On Dec. 18, 2024, the U.S. Department of the Treasury and the IRS issued Notice 2025-04, which states that they intend to issue proposed regulations providing guidance for U.S. taxpayers that elect to use the SSA for transfer pricing under the OECD’s Pillar 1 Amount B rules. The SSA is intended to lower taxpayer burdens associated with transfer pricing, such as financial and compliance burdens and dispute resolution costs, and reduce the administrative burden on tax authorities.
The OECD Pillar 1 Amount B framework allows for the SSA to be adopted on an elective basis via two options. Under option one, a taxpayer resident within its local jurisdiction may elect to apply the SSA approach. Under option two, the tax authority specifies that the SSA applies to a taxpayer and the tax authority when certain criteria are met. Notice 2025-04 provides that, at a minimum, proposed regulations will be issued that are consistent with option one. Specifically, the proposed regulations will allow the taxpayer to elect the SSA on a transaction-by-transaction basis with respect to a taxable year. If the taxpayer wishes to apply the SSA to the same transaction for future taxable years, a new election will need to be filed.
Crowe observation
This is a departure from the OECD Pillar 1 Amount B framework, which provides that a taxpayer applying the SSA will apply the SSA for a minimum of three years, unless there is a change in the taxpayer’s business.
Under the proposed regulations, the SSA will be a safe harbor in applying the arm’s-length standard. However, for taxpayers electing to apply the SSA, the IRS will treat the SSA to be the best method under the best method rule for transfer pricing, unless the comparable uncontrolled price (CUP) method can reasonably be considered the best method.
From a technical perspective, the safe harbor ranges created by the global comparable sets under the Pillar 1 Amount B framework are expected to be relatively consistent with generally accepted arm’s-length ranges under a standard comparable profits method and the transactional net margin method. However, they do provide opportunities for planning. For example, determining to elect the SSA involves assessing the facts and circumstances of the marketing or distribution function to establish whether the functional categorization aligns to the intended expected return. Determining whether limited risk truly means “no risk,” as implied by the matrix, or “some risk,” as a market-based (arm’s-length) result might establish by using bespoke comparable company benchmarks (or other methods), might be part of a taxpayer’s analysis for determining whether to elect option one or option two.
Additionally, the notice previews how proposed regulations will implement the SSA, including:
According to the notice, the proposed regulations would apply to tax years beginning on or after Jan. 1, 2025. However, taxpayers may rely on the guidance provided in Notice 2025-04 if they apply such guidance in its entirety and in a consistent manner for tax years beginning on or after Jan. 1, 2025, and before the proposed regulations are published in the Federal Register.
The notice also requests comments on the following issues:
Adopting the OECD’s Amount B framework SSA does not represent a departure for the IRS from the arm’s-length standard applied under Section 482. Rather, adoption of the SSA is a way to get to an arm’s-length result that is more efficient for both taxpayers and the IRS. In this way, the Pillar 1 Amount B framework is unlike the Pillar 2 global minimum tax framework, which has not been favorably viewed by the current administration. As a result, the proposed regulations previewed in Notice 2025-04 have a reasonable chance of being issued.
U.S. taxpayers should consult with their tax advisers to model their global effective tax rates and cash flow results if they elect SSA under Notice 2025-04 and how those results compare with alternative benchmarks or methods. This analysis should be done based on current supply chains and potentially changing global supply chains. In addition, taxpayers should keep abreast of developing U.S. international tax and trade policy as well as tax and trade policy developments outside of the United States.
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