Key Takeaways

The Amount B Notice has been long awaited after announcements of the Department of Treasury that guidance would be issued by the end of the year. Taxpayers and advisors are pleased to see that unlike the Irish and Dutch guidance, the Department of Treasury and the IRS opted for the broadest possible application of Amount B by offering taxpayers the simplified and streamlined approach for both inbound and outbound transactions. This is a meaningful step toward tax certainty and taxpayers should weigh the benefits of adopting Amount B for their operations.

The Amount B Notice states that the forthcoming proposed regulations will be in line with the OECD Report on Amount B issued on February 19, 2024 and the subsequent June 17, 2024 guidance (“OECD Guidance”). The proposed regulations will provide a new method under Treas. Reg. §1.482 to price certain controlled transactions involving baseline marketing and distribution activities. Taxpayers can rely on the Amount B Notice for taxable years beginning on or after January 1, 2025 and comments are requested by March 7, 2025. Taxpayers can elect to apply Amount B to in-scope transactions as a safe harbor, while Treasury and the IRS are still considering whether or not the IRS will be able to apply Amount B where the taxpayer has not made the election, thus making the application of Amount B mandatory.

In more detail

Scoping criteria

Amount B allows US baseline wholesale distributors of foreign principals with in-scope transactions as well as foreign distributors of US principals to opt for the application of Amount B under the Amount B Notice. The Department of Treasury and the IRS are still considering whether proposed regulations should also permit the IRS to apply Amount B, now known as the simplified and streamlined approach (“SSA") to in-scope transactions. Presumably, under such rule the IRS would apply the SSA if the taxpayer did not choose to apply it and the operating margin is below the operating margin as determined under the Amount B Notice if it is a US distributor or it is above the Amount B operating margin if it is a foreign distributor. Treasury requests comments specifically on this point. 

The Amount B Notice allows the application of the SSA to baseline wholesale distributors of tangible goods (“Qualifying Transaction”) and as expected, does not broaden it to include digital goods. A Qualifying Transaction where (a) the Distributor is a US Distributor or (b) the Distributor Country has not adopted the SSA, is in scope if it meets the upper bound of the operating expenses-to-revenues scoping criterion 30%. If the Distributor is a non-US Distributor, and the Distributor Country has adopted the SSA, then the upper bound is the upper bound specified by the law of the Distributor Country, but no lower than 20% and no higher than 30%. 

There remains potential for double taxation where the Distributor country has not adopted the SSA, but the U.S. taxpayer elects the SSA nevertheless, or, if relevant future guidance supports this, the IRS applies the SSA on a mandatory basis. Such a situation could, for example, exist in relation to the Netherlands and Ireland, as both countries adopted Amount B only vis-à-vis Covered Jurisdictions per the OECD Guidance, which the U.S. is not.

Election to apply SSA

Taxpayers choosing to apply the SSA have to file an election on a transaction by transaction basis and this election has to be renewed for each taxable year. The statement filed with the relevant tax return must be titled “Election to apply the SSA” and include the following information:

• The transaction(s) to which the taxpayer elects to apply the SSA. 
• A basic description of each transaction, 
• identify the entities participating in each transaction (both name and taxpayer identification number, if applicable), and 
• specify the entities’ respective places of incorporation (or jurisdiction of tax residence, if different from place of incorporation). 

Solely for the purpose of identifying the transactions to which an election applies, transactions may be grouped on the basis of products, product lines, or similar groupings if such grouping basis reasonably enables the Commissioner to distinguish transactions covered by the election from transactions not covered by the election while also avoiding the impracticality of listing each individual transaction that is covered.

Treasury is inviting comments on the question whether there should be a possibility to make the election based on different criteria, such as that an election has to be made consistently to all in-scope transactions, to categories of in-scope transactions, or to a single in-scope transaction for multiple years. 

Implications of the election

A taxpayer’s valid election to apply the SSA to an in-scope transaction for a taxable year means that the SSA is automatically considered the best method under Treas. Reg. §1.482 and the election shall constitute consent to the IRS’s use of the SSA in calculating any applicable adjustment to such transaction in such taxable year. Thus, once the election to apply the SSA has been made, the taxpayer may no longer rely on any other transfer pricing method that would otherwise be available under applicable law. Meaning, if the IRS posits that the facts and financial ratios result in a different return within the pricing matrix, the taxpayer will not be able to propose another transfer pricing method as the best method to support their position.

In line with the OECD Guidance, the SSA will not be considered the best method, if any relevant party (that is, the Distributor, the Related Supplier, or either tax administration) demonstrates that the comparable uncontrolled price method described in Treas. Reg. §1.482-3(b) using one or more internal comparables can be applied more reliably than the SSA. If the taxpayer reasonably concluded that it elected to apply the SSA instead of the comparable uncontrolled price method, the taxpayer will be deemed to have met the requirements of IRC Sec. 6662(e)(3)(B)(i)(I) and Treas. Reg. §1.6662(d)(2)(ii)(A). The emphasis here is on “reasonably” and taxpayer will have to be able to evidence that to avoid penalties. 
It is noteworthy that the Amount B Notice stipulates that the SSA is considered an unspecified method for purposes of IRC Sec. 482 for out-of-scope transactions. However, if the SSA is applied to out-of-scope transactions, the Amount B Notice does not apply and the taxpayer will have to demonstrate under normal rules that the SSA is the best method for this specific transaction.

TP adjustments

If the IRS determines that a transaction is not an in-scope transaction, the pricing will be determined based regularly applicable rules under Treas. Reg. §1.482. If the transaction is an in-scope transaction but the taxpayer determined the pricing incorrectly, an adjustment is made to the correct pricing under the Amount B Notice. If the tested party’s reported return-on-sales percentage falls within the range correctly determined under the Amount B Notice, then no adjustment will be made; if it falls outside that range, the taxable income will be adjusted to the midpoint return-on-sales percentage specified in the applicable matrix cell. 

Documentation requirements

Documentation to establish that the taxpayer reasonably concluded that (i) any transaction(s) to which it has elected to apply the SSA were in-scope, and (ii) the taxpayer properly calculated the return under the SSA, has to be maintained and provided to the IRS within 30 days of a request. As with other transfer pricing documentation, such documentation must be in place at the time the tax return for the relevant year is filed. 

Further, taxpayer has to maintain comprehensive books and records that are sufficiently detailed to verify that it has complied with the SSA as detailed in the OECD Guidance. The Amount B Notice gives detailed guidance on the content of these books and records, which notably includes a copy of the intercompany agreement(s) with terms that support in form and substance eligibility of the transaction to which the SSA is being applied.

Conclusion

The Amount B Notice is welcome guidance and the fact that the Treasury Department and the IRS opted for a broad application of Amount B adds to future tax certainty. However, more detailed guidance is expected and the devil might then be in the details. Interested parties should consider submitting comments to this guidance.

Right in time, the OECD published a Pricing Automation Tool on December 19, 2024 to help taxpayers and tax authorities alike to calculate the returns under the SSA based on the OECD Guidance. We will inform you about this tool in more detail in a separate alert.