In Notice 2025-04 (Notice), the Treasury and IRS announced their intent to issue proposed regulations and other guidance on applying the SSA method of the Organisation for Economic Co-operation and Development (OECD) for pricing certain controlled transactions involving baseline marketing and distribution activities. Taxpayers subject to US tax on in-scope transactions may rely on the Notice and elect to apply the SSA for tax years beginning on or after January 1, 2025.

The IRS and Treasury intend to implement "in its entirety" the substance of the OECD's February 2024 report on Pillar One Amount B (the Report), including supplemental statements released in June 2024 (the Statements), in the proposed guidance (see Tax Alerts 2024-0449 and 2024-1225).

The IRS requested comments to be submitted on the Notice by March 7, 2025.

Background

In October 2021, the OECD released a statement reflecting high-level agreement of the Inclusive Framework on BEPS member jurisdictions on key parameters of Pillars One and Two of the BEPS 2.0 project, together with an implementation plan (see Tax Alert 2021-6034). As described in the October 2021 statement, Amount B would simplify and streamline the application of the arm's-length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. The OECD released public consultation documents on Amount B in December 2022 and July 2023, which reflected the ongoing work on Amount B, as well as issues that remained open (see Tax Alerts 2022-6222 and 2023-1316).

The Report, released in February 2024, was incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (Guidelines). Jurisdictions can choose to apply the Amount B approach for in-scope transactions of tested parties in their jurisdictions for fiscal years starting on or after January 1, 2025.

The Statements, released in June 2024, included two documents on the Pillar One Amount B approach for transfer pricing for certain baseline marketing and distribution transactions (see Tax Alert 2024-1225). The Statements were also incorporated into the Guidelines (though a version of the Guidelines containing both the Report and Statements has not yet been published).

The Notice

The Notice informs taxpayers of future proposed regulations and sub-regulatory guidance on the SSA, as well as providing rules on which taxpayers may rely in the meantime.

Taxpayers can use the SSA for applying the arm's-length principle to baseline marketing and distribution activities. According to the Notice, the SSA is similar to the comparable profits method under Treas. Reg. Sections 1.482-3(a)(4), 1.482-5 and 1.482-9(a)(5) and (f).

The Notice reviews the SSA requirements in the Report, noting that a jurisdiction that implements the SSA may choose from two options. Under Option 1, the SSA can apply only if, among other considerations, a taxpayer elects for it to apply. Under Option 2, a taxpayer can elect to apply the SSA as under Option 1, but the tax administration of the Distributor Country that has implemented the SSA may also apply the SSA even if the taxpayer does not elect to apply it. With this definition of Option 2, the Treasury and IRS clarify what is meant in the OECD Reports by "mandatory" adoption of Amount B. Option 2 grants both taxpayers and tax authorities the right, but not the obligation, to apply Amount B. According to the Notice, the Treasury and IRS intend to issue proposed regulations that are consistent with Option 1 and will continue to consider whether they should apply in the case of Option 2.

Qualifying for the SSA

To qualify for application of the SSA, the following conditions must be met:

• The controlled transaction must be a qualifying transaction
• The qualifying transaction must be an in-scope transaction, with the upper bound of the operating expenses-to-revenue being (1) 30% for US distributors and for non-US distributors in jurisdictions that have not adopted the SSA, and (2) between 20% and 30% for non-US distributor jurisdictions that adopt the SSA
• Application of the SSA must be elected through the procedure in Section 4.06 of the Notice
• The taxpayer must maintain adequate, permanent books of account and records, as specified in Section 4.07 of the Notice

The Notice specifies how to apply SSA for US tax purposes. Specifically, the Notice describes identification of the relevant matrix cell, operating expense cross-check, data availability mechanism for qualifying jurisdictions, and qualifying jurisdictions for purposes of Sections 5.2 and 5.3 of the Report. All of these aspects are defined and explained in detail in the OECD Report and Statements (see Tax Alerts 2024-0449 and 2024-1225).

SSA safe harbor

The proposed regulations will incorporate the SSA as a taxpayer safe harbor. According to the Notice, because the safe harbor is based on the SSA in the Guidelines and the Report, which may be revised, compliance with the Notice is based on the version of those documents at the time the Notice is issued.

The Commissioner will deem a valid election to apply the SSA to an in-scope transaction as the best method under Treas. Reg. Section 1.482-1(c). In this case, the SSA will be considered a specified method. If the taxpayer does not comply with the safe harbor guidelines, however, the SSA will be considered an unspecified method.

If the Commissioner determines that all the safe harbor requirements are met, the Commissioner will not make an IRC Section 482 adjustment to that transaction. If a valid SSA election is made, but the income allocation was not properly calculated, the Commissioner's adjustments would be to the proper amount of the (properly calculated) in-scope transaction determined under the SSA and any other amounts determined under other parts of IRC Section 482.

A properly applied SSA election will be protected from penalties under IRC Section 6662 if the taxpayer reasonably applied the SSA, considering all relevant facts and circumstances. In addition, if application of the comparable uncontrolled price (CUP) method using one or more internal comparables would be more reliable, then the transaction will still be eligible for IRC Section 6662 protection, even if the SSA election would be valid.

Election procedure

A taxpayer must elect to apply the SSA on a transaction-by-transaction basis for the tax year for which the election is filed.

To elect to apply the SSA, a taxpayer must file, with its original return for the tax year for which the election is made, a statement that:

• Is titled "Election to apply the SSA"
• Indicates the transaction(s) to which the taxpayer elects to apply the SSA
• Includes a basic description of each transaction
• Identifies the entities participating in each transaction (both name and taxpayer identification number, if applicable)
• Specifies the entities' respective places of incorporation (or jurisdiction of tax residence, if different from place of incorporation)

Solely for the purpose of identifying the transactions to which an election applies, taxpayers may group transactions on the basis of products, product lines or similar groupings if that reasonably enables the Commissioner to distinguish transactions covered by the election.

Documentation

Taxpayers must maintain sufficient documentation to establish they reasonably concluded that, given the available data, (1) the transactions to which they elected to apply the SSA were in-scope, and (2) they properly calculated the return under the SSA. Documentation must be provided to the IRS within 30 days of a request in connection with an examination of the tax year to which the documentation relates. The Commissioner may excuse a minor or inadvertent failure to provide required documents at the Commissioner's discretion if the taxpayer has made a good faith effort to comply and promptly remedies the failure when it becomes known.

Taxpayers must maintain books and records that are sufficiently detailed to verify that they have complied with the SSA. Section 4.07 of the Notice gives a specific list of what the records must include.

Competent authorities

Other jurisdictions may not respect the application of the SSA or may interpret the SSA's requirements differently. In addition, the competent authority of one government cannot support a taxpayer's position based on the SSA if the other government has not implemented the SSA or agreed to accept the application of the SSA in that case. The Notice suggests that taxpayers carefully consider Section 8 of the Report for these issues.

Implications

It is notable that the proposed regulations do not depend on other countries adopting Amount B, or even on a critical mass of countries adopting Amount B. The Treasury and IRS seem to be committing to some application of Amount B regardless of what other countries decide to do. The Treasury and IRS have provided such "unilateral-if-necessary" guidance before, such as the interest-rate safe harbor and the services-cost-method safe harbor.

Taxpayers now know that the detailed guidance in the Report and Statements form the basis of the US regulatory application of the SSA. This is important information that will allow taxpayers to evaluate and model Amount B with some confidence, at least for distribution activities that connect to the United States. This should help them decide whether to take advantage of the safe harbor, and what the implications would be if Amount B is imposed on them under a possible Option 2.

If other countries take a contrary position on Amount B, potential systemic double tax remains a possibility. The fact that the United States has now committed to instituting Amount B makes this closer to reality.