US: IRS Outlines Plans on Simplified Approach for Pricing Controlled Transactions Involving Marketing and Distribution activities

Internal Revenue Service building, Washington DC | by Tim Evanson

The IRS has released Notice 2025-4, outlining plans for forthcoming proposed regulations on transfer pricing under section 482. These regulations will introduce a Simplified and Streamlined Approach (SSA) for pricing controlled transactions involving baseline marketing and distribution activities, aligning with the February 19, 2024 OECD report on Amount B of Pillar One.

KEY HIGHLIGHTS OF NOTICE 2025-4

• Simplified and Streamlined Approach (SSA):

• Designed for pricing certain controlled transactions.

• Based on the OECD’s February 2024 report.

• Taxpayer election applies transaction-by-transaction and year-by-year.

• Alignment with OECD:

• Proposed regulations are expected to closely follow the OECD report.

• The Treasury and IRS will adopt the report's substance entirely.

• Certain SSA updates may be issued via sub-regulatory guidance (e.g., revenue procedures).

• Effective Date:

• Applies to tax years starting on or after January 1, 2025.

• Taxpayers can rely on sections 3 and 4 of Notice 2025-4 for tax years beginning before the final regulations are published.

• Taxpayer Reliance:

• Taxpayers may use SSA guidelines as described in the OECD report, supplemented by later statements, if applied consistently with sections 3 and 4 of the notice.

REQUEST FOR COMMENTS BY MARCH 7, 2025

The Treasury and IRS seek comments on the following:

1. Taxpayer Election vs. IRS Application:

• Should the SSA depend solely on taxpayer election, or should the IRS be allowed to apply it without a taxpayer's election?

• Should SSA eligibility for U.S. taxpayers depend on its adoption by counterparty jurisdictions to ensure symmetry?

2. Election Limitations:

• Should elections apply more broadly to categories of transactions or multiple years, instead of being transaction-by-transaction and year-by-year?

• Considerations for simplicity and effective tax administration.

3. Scoping Criterion:

• Views on the appropriateness of setting the operating expense-to-net revenue ratio upper boundary at 30% (per section 3.2 of the OECD report).

SOURCES/ RECOMMENDED READ: 

• N-2025-04

• Notice 2025-4: Application of Pillar One Amount B simplified and streamlined approach