What the IRS’s proposed Option 2 under Amount B means for multinationals

In a global tax environment where simplification and certainty are paramount, the IRS’s recent guidance (Notice 2025-04) regarding transfer pricing has introduced a new development: the potential adoption of Option 2 under the Simplified and Streamlined Approach (SSA). But does this move truly provide multinationals with a path to administrative ease, or are multinationals being pushed into uncharted waters with increased compliance burdens and uncertainty?

At its core, the SSA was designed to ease transfer pricing complexities and provide a structured, simplified approach to income allocation. Following the OECD, the IRS has presented two implementation pathways: Option 1, which allows taxpayers to voluntarily elect the SSA as a safe harbor, and Option 2, which not only permits taxpayer election but also grants the IRS the authority to impose the SSA, even if a company has not elected to use it. While Option 1 upholds the spirit of simplification, Option 2, if unilaterally adopted, could compromise many of the potential benefits of the SSA. It also could result in additional complexity and costs for both taxpayers and tax authorities — the opposite of the SSA’s initial intention.

Compliance complexity: The opposite of simplification

One of the fundamental advantages of the SSA is the ability to streamline compliance and reduce administrative burdens for businesses. However, Option 2 has the potential to do just the opposite. Instead of providing relief, if unilaterally adopted without global adoption, it could force companies to conduct additional transfer pricing analyses related to the risk of the SSA being imposed upon them.

Under Option 2, even if a company did not elect the SSA, it would need to analyze its potential exposure to an IRS-imposed SSA scenario. This could mean:

• Additional time and resources spent on compliance, documentation, and risk assessment.
• A paradox where a regulation designed to reduce costs could, in practice, increase them.

Uncertainty and risk: IRS application of the SSA and its global applications

The SSA was designed to approximate an arm’s length result — a methodology meant to simplify compliance through bypassing extensive economic analysis. However, if the IRS is allowed to impose the SSA, particularly in a scenario where the SSA results are not otherwise respected by counterparty jurisdictions, the very principle of simplification could be called into question. This could lead to:

• Heightened disputes where the SSA results deviate from the results as determined under a traditional “best method” analysis pursuant to transfer pricing rules in the counterparty jurisdiction.
• Increased Mutual Agreement Procedure cases as companies face double taxation arising from required SSA application.

The domino effect: If the IRS adopts Option 2, other jurisdictions could follow

If the IRS does adopt Option 2 and has the authority to unilaterally impose the SSA, foreign tax authorities could follow suit. However, given the slow adoption of the SSA, this could lead to:

• Heightened global uncertainty as different jurisdictions begin to implement their own SSA imposition policies.
• A greater likelihood of transfer pricing disputes that could tie up companies in audits and negotiations for years.
• An increase in compliance burdens for taxpayers so long as widespread adoption of the SSA is not achieved, making the SSA feel less like a simplification tool and more like yet another layer of complexity for taxpayers to manage.

The missed opportunity: Diverting resources away from high-risk transactions

One of the main intended benefits for the SSA is to allow tax authorities to shift their focus away from lower-risk transactions and onto more complex or higher-risk cases. Yet, if Option 2 is adopted unilaterally or only by a few jurisdictions, it could have the unintended consequence of:

• Increasing scrutiny of lower-risk transactions, which could divert IRS resources away from more pressing tax compliance challenges.
• Driving up administrative inefficiencies, with mismatched adoption across countries leading to more disputes, more red tape, and higher compliance costs.

Option 2, if implemented without global adoption, could introduce greater complexity, uncertainty, and compliance costs, eroding the benefits the SSA was meant to provide unless the OECD is able to encourage widespread adoption of Amount B. Businesses should proactively assess their exposure, evaluate alternative compliance strategies, and stay engaged in consultation efforts to advocate for policies that truly support tax certainty and administrative efficiency.

The transfer pricing landscape is evolving, and proactive planning is essential. Companies should consider conducting impact assessments, engaging with industry groups, and staying informed on regulatory developments to navigate these shifting waters. In a world where compliance demands are growing, businesses that take control of their strategies now will be better positioned to avoid disruption and maintain stability in an increasingly uncertain tax environment.