Navigating the Evolving Terrain of Transfer Pricing: The Impact of Pillar One, Pillar Two, and Technology

The realm of transfer pricing is in a constant state of flux, continually adapting to changing regulations and market conditions. This year is likely to be recognized as a critical juncture in the history of transfer pricing, mirroring the significance of 2015 when the Base Erosion and Profit Shifting (BEPS) Action Plan was cemented. The onset of the Pillar One and Two marks the beginning of new changes that shift the perspective on how transfer pricing will be viewed going forward. The OECD’s Pillar Two initiative, which aims to establish a global minimum effective tax rate of 15%, is a significant international tax development impacting multinational enterprises (MNEs). The perspective on transfer pricing has transformed from being a straightforward documentation compliance exercise to a strategic necessity, one that requires foresight and planning in anticipation of potentially significant tax implications for the company.  

Pillar One and Pillar Two: The Game Changers in Transfer Pricing and Technology 

Among the most consequential developments in the field of transfer pricing are the introduction of Pillar One and Pillar Two. These pillars are reshaping the way technology is employed in the realm of transfer pricing. Pillar One aims to ensure the fair allocation of taxing rights among countries, especially concerning global digital companies, while Pillar Two sets a global minimum corporate tax rate, reducing the incentive for multinational corporations to shift profits to low-tax jurisdictions. These changes are not only affecting the rules of the game but are also driving the development and adoption of new technology solutions to manage transfer pricing. The evolving landscape necessitates the use of advanced tools for data analysis, risk assessment, and strategic planning. Thus, the intersection of transfer pricing and technology is an area of growing importance, one that is set to redefine the future trajectory of this critical aspect of international taxation. 

Pillar two defines the scope and sets out the mechanism for the Global Anti-Base Erosion (GloBE) rules which will enforce a global minimum corporate tax rate at 15%.  The introduction of a global minimum tax of 15% and the incorporation of tax accounting concepts into tax law for the purposes of considering effective tax rates represent a fundamental shift in the way businesses are taxed. The minimum tax will apply to multinational enterprises (MNEs) with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. The new Pillar Two model will provide for a coordinated system of taxation intended to ensure that the large corporate groups pay the minimum level of tax. The rules will be in effect from December 31, 2023, for the countries to adopt and adhere to Pillar Two into domestic legislation, multinational, and domestic top-up tax rules. 

The Use of Technology in the Changing Transfer Pricing Landscape  

With the new rules in place, there is a need for more transparency and documentation compliance by the corporate groups in the jurisdictions they function within. There is an increased need of compliance because of BEPS 2.0 as well as Pillar Two, which requires more in-depth details on corporate structures, financial details, mergers and acquisitions (M&A) and ownership structures of corporate groups. With more of an understanding of the way in which a corporate group is structured and functioning, the corporate group itself, the accounting firm assisting it and the tax authorities can investigate and ensure adherence to the laws as applicable. 

Whether it is transfer pricing documentation compliance, preparing for an audit and investigation, evolving laws or finding out the risk of the tax payers, we can support you in your journey. To learn more, contact us.