Alert
New Streamlined OECD Approach Offers Opportunities for US Taxpayers in 2025
The US Department of the Treasury and the IRS announced in Notice 2025-04 their intent to issue proposed regulations for implementing the Organization for Economic Co-operation and Development’s (OECD) simplified and streamlined approach (SSA) for pricing-controlled transactions involving baseline activities, which refer to standard operations of distributors – such as wholesale distributors and sales agents – engaging in the purchase of goods for wholesale distribution to unrelated parties.
The objectives of the new OECD approach are to:
- Reduce administrative burdens and compliance costs
- Minimize lengthy and costly cross-border tax disputes
- Facilitate efficient dispute resolution
- Enhance tax certainty for both tax administrations and taxpayers
US taxpayers involved in-scope transactions—qualifying transactions with low-risk distributors and related suppliers that meet the scoping criteria, that is tested party’s annual operating expenses must not be lower than 3% or greater than an upper bound of 20-30% of its annual net revenues, established under the OECD’s Amount B guidelines—can rely on the notice and elect to apply the SSA for tax years beginning January 1, 2025.
Background and US Application
The OECD published a report on Amount B, part of the Pillar One initiative of the OECD/G20 Inclusive Framework on BEPS, in February 2024 aimed at improving tax certainty, reducing compliance costs, and alleviating administrative burdens.
In June 2024, the OECD released additional statements incorporated into the Amount B Guidelines.
Implementing the SSA
The IRS and Treasury have announced their intention to implement the OECD's report on Pillar One Amount B, including the supplemental statements from June 2024. Interim rules will be available during this transition period.
Key points include:
- Implementation of the New Approach. U.S. taxpayers can use SSA to apply the arm's length principle for pricing-controlled transactions related to baseline marketing and distribution activities. These activities are characterized by low risk and standardized nature, such as marketing products or selling to customers.
- Updates and Guidance. While the OECD’s SSA will be fully implemented, some aspect may require updates based on economic analysis changes.
Qualification for the New Approach
US taxpayers applying the SSA to a controlled transaction must follow key steps.
First, confirm the controlled transaction is a qualifying transaction.
Next, determine in-scope classification:
- Non-US Distributors. If the distributor is not based in the United States but in a country that has adopted the new OECD approach, the operating expenses-to-revenues upper bound is set by that country’s law—20% - 30%.
- US Distributor or Using Traditional OECD Approach. The upper bound is fixed at 30%.
US taxpayers may elect to apply SSA if the transaction is in-scope, as outlined in Section 4.06 of the notice.
Additionally, taxpayers must keep records verifying in-scope transactions and correct income calculation under the simplified and streamlined approach, as specified in Section 4.07 of the notice.
Safe Harbor
In releasing this new transfer pricing safe harbor, the Treasury and the IRS outline steps taxpayers must take to elect the SSA and maintain documentation, along with how the commissioner will acknowledge this election.
If a valid election is made for an in-scope transaction, the SSA is considered the best method, eliminating the need for further demonstration. The commissioner may challenge the in-scope status of a transaction, but if the approach is properly applied, no adjustments will be made under Section 482.
If the transfer price is incorrectly calculated, adjustments will be limited to aligning the amount with the SSA. A valid election also permits the IRS to use the SSA for applicable adjustments, preventing taxpayer from later disavowing reliance on it.
A properly executed election will be protected from penalties under IRC Section 6662 if reasonably applied.
Election Procedure
Taxpayers can elect the SSA on a transaction-by-transaction basis for the taxable year of the election by filing a statement with their original tax return. Transactions may be grouped by products or product lines for easier identification, provided the grouping allows the commissioner to distinguish covered transactions.
To apply the SSA to the same transaction in future years, a new election statement must be submitted for each taxable year.
Documentation
If a taxpayer chooses to apply the SSA to controlled transactions, maintaining proper documentation is essential for compliance.
Key requirements include evidence that the transactions are in-scope and properly calculated under the SSA, as well as documentation available at the time of filing and provided to the IRS within 30 days of a request during an examination.
For more details on required records, refer to Section 4.07 of the notice.
Implications for Your Business
The notice presents key considerations:
- Safe Harbors. Taxpayers should consult with a transfer pricing professional to evaluate safe harbor options to mitigate transfer pricing audit risks.
- Double Taxation Risk Assessment. A thorough risk assessment is necessary to address potential double taxation, especially if other countries interpret Amount B.
- International Coordination. Efforts should be made to ensure consistent application of Amount B across jurisdictions to avoid discrepancies.
Next Steps
The release of Notice 2025-04 is a key step in implementing the OECD’s SSA for pricing-controlled transactions involving baseline marketing and distribution activities. U.S. taxpayers should review their pricing strategies and assess the simplified and streamlined approach’s impact.
Taxpayers can attend the OECD's webinar on February 11, 2025, to learn more about Amount B. Comments on the notice are due to the IRS by March 7, 2025.
Consulting with international tax professionals can also help taxpayers comply with the new requirements.
We’re Here to Help
To learn more about international transfer pricing strategies and how the new OECD approach can benefit your business, contact your Moss Adams professional.