Starting in 2025, taxpayers should review their options for pricing intercompany marketing and distribution transactions. On Dec. 18, 2024, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued Notice 2025-04, which announced the intent of Treasury and the IRS to issue proposed regulations consistent with the Organization for Economic Co-operation and Development’s (OECD) report regarding Amount B (OECD Amount B Report). The OECD Amount B Report, issued on Feb. 19, 2024, provides guidance on a simplified approach to establishing a fixed return for baseline intercompany marketing and distribution activities (Simplified and Streamlined Approach or SSA). The fixed return on sales earned in transactions involving these activities, known as Amount B, is taxable in the jurisdiction of operation.
Details of Notice 2024-04 and how they relate to OECD Amount B Report
Notice 2025-04 provides that U.S. taxpayers may elect annually to apply the SSA to qualifying transactions for tax years beginning after Jan. 1, 2025, even though final regulations aren’t yet published. With Notice 2025-04, the United States joins a host of other countries including Argentina, Brazil, Costa Rica, Mexico, and South Africa, who have announced their intent to adopt the SSA approach in determining Amount B.
The initial rules presented in Notice 2025-04 largely mirror the guidelines presented in the OECD Amount B Report and propose to incorporate the SSA as a safe harbor application of the arm’s-length standard under the Internal Revenue Code (IRC) Sec. 482 for certain qualifying intercompany marketing and distribution activities. Qualifying transactions for application of the SSA include:
- Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprise for wholesale distribution to unrelated parties.
- Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution of goods to unrelated parties.
If the qualifying criteria are met, and the taxpayer elects to apply the SSA, taxpayers then determine their intercompany pricing mechanically through the application of a pricing matrix to determine the specific operating margin to target. Target operating margins presented in the pricing matrix range from 1.5 to 5.5% depending on the industry and certain financial metrics of the taxpayer.
Considerations for next steps
Companies with potential qualifying transactions may want to take advantage of the SSA approach for 2025. However, application of the SSA will require analysis to evaluate the impact of the approach and appropriate documentation to support the transaction. As part of the overall analysis, it will be important to consider whether the jurisdiction of the counterparty to the transaction has also adopted Amount B. For example, if both countries have adopted Amount B, application of the SSA, if appropriate, should be respected by the tax authorities in each country. On the other hand, if the counterparty jurisdiction isn’t adopting Amount B, then a traditional comparable profits method and comparables analysis likely would still be required to support the transfer pricing in the other country, even though the United States would respect the SSA approach. In either case, whether applying the SSA, or the traditional comparable profits method with a comparables’ analysis, taxpayers will continue to need documentation to demonstrate reasonable application of the selected method and provide penalty protection under IRC Sec. 6662.
On Jan. 20, 2025, an executive order was issued by President Trump to freeze all proposed regulations across agencies. This could impact whether the Amount B proposed regulations will continue to move forward. While this freeze is typical for incoming administrations, another executive order states that the “OECD Global Tax Deal” has no force or effect in the United States and may mean that proposed regulations for the SSA safe harbor will not go into effect. Given these changes, it’ll be important for taxpayers to continue to monitor and manage transfer pricing policies to optimize results in the developing landscape.
