Beginning in 2025, the Internal Revenue Service (IRS) plans to introduce the Streamlined and Simplified Approach (SSA) for transfer pricing related to marketing and distribution activities. Modeled after the OECD’s Amount B simplification framework[3], the SSA seeks to standardize and simplify the determination of arm’s-length returns for routine distribution functions. By leveraging predefined pricing matrices, this approach promises greater tax certainty, reduced compliance costs, and fewer transfer pricing disputes for both taxpayers and tax authorities.
The SSA is particularly advantageous for foreign groups operating in the U.S., as it simplifies transfer pricing for subsidiaries engaged in routine distribution with limited risk and complexity. However, uncertainties remain due to its dependence on elements of the OECD’s Global Tax Reform[4], which has faced resistance from the current U.S. administration. Multinational companies evaluating the SSA should proceed cautiously while monitoring developments under the current administration.
US transfer pricing rules mandate that intercompany transactions between related parties must reflect arm’s-length standards, meaning they should mirror transactions between independent parties. The IRS has broad authority to adjust the pricing of these transactions if they deviate from arm’s-length values, potentially leading to significant tax liabilities and penalties.
The OECD plays a pivotal role in shaping international tax legislation, primarily focused on combating Base Erosion and Profit Shifting (BEPS). Notably, its guidance on transfer pricing, which emphasizes application of the arm’s-length principle, has achieved widespread adoption by tax authorities globally, significantly impacting how intercompany transactions are scrutinized and valued.
On December 18, 2024, the IRS issued Notice 2025-04, outlining its intent to implement the SSA as part of Section 482 of the Internal Revenue Code for tax years starting January 1, 2025. This aligns U.S. practices with OECD Transfer Pricing Guidelines and offers taxpayers a safe harbor through active election procedures. The notice details the election and documentation requirements, while highlighting potential extensions of SSA applicability during audits, even without taxpayer election.
Importantly, the SSA’s relevance for U.S. taxpayers extends beyond the release of the Notice. Even if it is withdrawn, the SSA’s adhesion to the Amount B included in the OECD Guidelines ensures its potential adoption by other jurisdictions. This international recognition gives the SSA practical relevance, particularly in Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs). Whether formally adopted by the IRS or not, the SSA will likely play a role in negotiations involving routine distribution, providing a benchmark and potential leverage point.
The SSA presents U.S. taxpayers with significant benefits, such as lower compliance burdens and improved tax certainty. However, the framework’s standardized nature may overlook unique economic circumstances, potentially leading to inaccurate tax outcomes or disputes. Moreover, its reliance on fixed ranges and predefined criteria may limit flexibility for businesses with diverse models or market conditions.
While the future of the SSA in U.S. regulations depends on evolving governmental policies, its impact on global transfer pricing discussions is inevitable. Multinational companies should prepare for its practical influence on negotiations involving routine distribution activities.
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[1] U.S. Technical Lead at Altus Transfer Pricing.
[2] Economist at Altus Transfer Pricing.
[3] Amount B is an integral part of the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy agreed by the OECD/G20 Inclusive Framework on BEPS in October 2021. It introduces a simplified and streamlined approach for applying the arm’s length principle to in-country baseline marketing and distribution activities, focusing on the needs of low-capacity jurisdictions.
[4] The OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) is a project involving over 140 countries and jurisdictions collaborating to address tax avoidance by multinational enterprises. It aims to modernize international tax rules to reflect the digitalized and globalized economy. The framework’s core is the two-pillar solution:
- Pillar One focuses on reallocating taxing rights to market jurisdictions where consumers are located, particularly for large digital companies.
- Pillar Two introduces a global minimum corporate tax rate of 15% to prevent a “race to the bottom.”
Within Pillar One, “Amount B” provides a simplified and streamlined approach to determine arm’s length returns for baseline marketing and distribution activities, aiming to reduce disputes and increase tax certainty.