Transfer Pricing – Amount B – December 2024 Updates

1. Simplified Streamlined Approach (SSA) by IRS:

   On Dec 18, 2024 US released Treasury Notice (NOTICE 2025-04) intending to issue regs on SSA in alignment with OECD PillarOne – Amount B. The SSA seeks to simplify pricing for baseline marketing & distribution activities by adopting a return on sales percentage from the global pricing matrix & EBIT-to-operating expense ratio cap & collar & country risk adjustment. Key aspects w.r.t. IRS’s notice, apart from Amount B framework, is summarised below:

   1. Taxpayer may rely on SSA for taxable years commencing from January 1, 2025.
   2. SSA similar to Comparable profits method (equivalent of TNMM in OECD guidelines). However, taxpayer can apply CUP (internal or external), where available, instead of SSA.
   3. US proposing applicability of SSA under Option 1 – i.e., at option of taxpayer. But also considering if Option 2 should be permitted viz., may be optional for taxpayer but IRS can decide to apply even if taxpayer has not opted for the same.
   4. Criteria for qualifying transaction – upper bound of Opex-Revenue is 30% for US distributor or if distributor country has not adopted SSA. If non-US distributor & the distributor country has adopted SSA, specified ratio should be x, where 20%≤ x ≤30%.
   5. Taxpayers need to Elect to apply the SSA along with tax return.
   6. Considering incorporating SSA as a Safe Habor – deemed satisfaction of arm’s length st&ard. After taxpayer‘s valid election to SSA no option to disavow later & shall constitute consent to IRS’s use of SSA in calculating any applicable adjustment. Taxpayers must have sufficient documentation proving compliance, which should be available at filing & provided to the IRS within 30 days upon request.
   7. Arm’s Length range & IQR not to apply to SSA.
   8. IRS evaluating an alternative election mechanism for SSA, other than on a transaction-by-transaction & taxable year basis.

   IRS ‘s Notice invites public comments on incorporation of above SSA within Regs 482 on or before March 7, 2025.

2. OECD –Amount B automated tool:

   On Dec 19, 2024 OECD released Pricing Automation Tool (Excel spreadsheet) to simplify the calculation of returns for in-scope parties with minimal data input. The key aspects are:

   1. Applicable for fiscal years starting on or after January 1, 2025.
   2. Jurisdictions included for illustration & do not reflect any intentions of adoption of Amount B. India not appearing in jurisdiction, perhaps due to reservations.
   3. Input data- jurisdiction, 3 years financial data – net revenues, COGS, operating expenses, fixed assets, working capital, & industry classifications.
   4. Key outputs – Evaluation of quantitative scoping criteria, Accounts payable, final return on sales after considering the pricing matrix, cap-&-collar mechanism & adjustments for operating expenses & data availability.