December 19, 2024

Overview Of IRS Notice 2025-04

IRS Notice 2025-04 introduces a new method for pricing controlled transactions involving baseline marketing and distribution activities, known as the Simplified and Streamlined Approach (SSA). This notice aims to simplify and streamline the application of transfer pricing rules under Section 482 of the Internal Revenue Code, reducing compliance burdens for taxpayers and administrative burdens for tax authorities.

Key Points Of IRS Notice 2025-04

  1. Purpose and Background:
    • The SSA is designed to simplify the pricing of controlled transactions involving baseline marketing and distribution activities.
    • It is based on the OECD’s “Pillar One – Amount B: Inclusive Framework on BEPS” report, published Feb. 19, 2024.
    • The SSA aims to reduce the financial and compliance burdens on taxpayers and the administrative burdens on tax authorities.
  2. Implementation:
    • Taxpayers can elect to use the SSA for U.S. tax reporting for taxable years beginning on or after Jan. 1, 2025.
    • The SSA determines a return based on comparables and is expected to closely approximate the best method in most cases.
    • The SSA involves several steps, including identifying qualifying transactions, determining if they are in scope, making an election, and maintaining adequate documentation.
  3. Application:
    • The SSA uses a pricing matrix to determine return-on-sales percentages and includes mechanisms for cross-checking operating expenses and adjusting returns for qualifying jurisdictions.
    • The SSA will be treated as the best method under section 482 if a valid election is made, and the IRS will respect the election for U.S. taxpayers.
  4. Safe Harbor:
    • The SSA provides a safe harbor for taxpayers, meaning that if a valid election is made, the SSA will be considered the best method for pricing controlled transactions.
    • Taxpayers must maintain sufficient documentation to support their use of the SSA and provide it to the IRS upon request.
  5. Request for Comments:
    • The Treasury Department and the IRS request comments on various aspects of the SSA, including its application, election procedures, and the selection of the upper boundary for the operating expense-to-net revenue ratio.
  6. Definitions and Applicability:
    • The notice provides definitions for key terms and states that taxpayers may rely on the guidance for taxable years beginning on or after January 1, 2025, and before the proposed regulations are published.

Next Steps For Tax Professionals

  1. Review the Notice:
    • Tax professionals should thoroughly review IRS Notice 2025-04 to understand the new SSA method and its implications.
  2. Evaluate Transactions:
    • Identify and evaluate controlled transactions that may qualify for the SSA. Determine if these transactions meet the criteria for in-scope transactions.
  3. Documentation:
    • Ensure that adequate documentation is maintained to support the application of the SSA. This includes detailed records of qualifying transactions, financial information, and any necessary adjustments.
  4. Election Process:
    • Prepare to make the election to apply the SSA for qualifying transactions. This involves filing a statement with the original tax return for the taxable year in which the election is made.
  5. Stay Informed:
    • Keep abreast of any updates or proposed regulations related to the SSA. The Treasury Department and the IRS may issue further guidance or revisions to the SSA.
  6. Submit Comments:
    • Consider submitting comments to the Treasury Department and the IRS on the SSA. Feedback from tax professionals can help shape the final regulations and ensure they are practical and effective.

By understanding and implementing the SSA, companies can navigate the complexities of transfer pricing and ensure compliance with the new regulations.

For more detailed information, you can access the full notice here. Alternatively, contact a GBQ tax professional for assistance.

By Chelsea Sander, CPA

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