The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2025-04 on December 18, 2024. It indicates that the Internal Revenue Service intends to introduce a new Simplified and Streamlined Approach (SSA) for transfer pricing under Section 482 of the Internal Revenue Code for certain controlled transactions involving baseline marketing and distribution activities.

Here’s a breakdown of what it is, who it’s for and what you need to do.

What is the SSA?

The SSA is a new framework designed to simplify and streamline the pricing of certain controlled transactions involving baseline marketing and distribution activities. It follows the guidance outlined in the Organization for Economic Cooperation and Development’s (OECD’s) “Pillar One – Amount B” report, which aims to reduce disputes, compliance costs and administrative burdens associated with transfer pricing.

The SSA is akin to existing simplification measures like the safe haven interest rate and services cost method but is tailored specifically for marketing and distribution activities. Unlike other methods, the SSA considers material factual differences between comparables and the tested parties, ensuring results closely approximate the best method.

Who is it For?

The SSA applies to U.S. taxpayers engaged in qualifying transactions involving marketing and distribution activities. Qualifying transactions must meet specific scoping criteria, including operating expense-to-revenue ratios and alignment with predefined categories. To qualify as in-scope, transactions must adhere to the OECD’s outlined upper and lower bounds for operating expenses and meet documentation and procedural requirements. These need to be reviewed and a strategy needs to be developed. Also, there needs to be evaluation of the foreign aspect of the application of these rules.

Key Benefits of the SSA

The SSA provides multiple advantages:

· Simplified compliance – Reduces complexities in calculating arm’s length pricing

· Cost efficiency – Minimizes financial and administrative burdens for taxpayers and tax authorities

· Certainty – Lowers the risk of cross-border disputes and provides more predictable outcomes

How to Apply the SSA

Taxpayers can elect to use the SSA for transactions starting in taxable years beginning on or after January 1, 2025. The election process involves:

1. Filing an election statement. Include a statement titled “Election to Apply the SSA” with your tax return. This must outline the transactions covered, participating entities, and their jurisdictions.

2. Maintaining documentation. Ensure adequate records support the eligibility and calculations under the SSA. Key documents include organizational structures, intercompany agreements, financial data, and scoping criteria.

3. Ensuring compliance. Properly calculate returns under the SSA and maintain compliance with Section 482 requirements.

Safe Harbor Benefits

The SSA will be treated as the best method under Treasury regulations. If a taxpayer validly elects to apply the SSA, the IRS will not require further demonstration of its reliability unless an alternative method proves more appropriate.

What to Watch For

Taxpayers must carefully consider several key factors when deciding to use the SSA. First, cross-jurisdiction considerations are crucial, as taxpayers need to ensure that both U.S. and foreign jurisdictions recognize and accept the SSA. The IRS is currently evaluating whether reciprocity from foreign jurisdictions should be a requirement for the SSA’s application.

Additionally, maintaining sufficient documentation is essential. Failing to do so could result in the election being deemed invalid. And the IRS retains the authority to challenge whether specific transactions qualify as in-scope or if the SSA was applied correctly, reinforcing the need for thorough compliance.

Taxpayers can rely on the SSA for taxable years starting on or after January 1, 2025, and before the publication of proposed regulations. Comments on the notice are welcome until March 7, 2025. The Treasury and IRS will consider updates and revisions based on stakeholder feedback.

What Should You Do?

If your business involves controlled transactions for marketing and distribution activities, start preparing for the SSA. You’ll want to review your transfer pricing policies to identify qualifying and in-scope transactions. As you do, ensure proper documentation and compliance procedures.

For further guidance, reach out to us.