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Pillar Two and Transfer Pricing

The Pillar Two GloBE Rules generally reflect standard transfer pricing principles by requiring transactions between entities located in different jurisdictions to be priced in accordance with the arms-lenth basis.

The OECD transfer pricing guidelines apply to determine the arms-length basis. 

Importantly, decisions of domestic tax administrations are respected so that adjustments arising from a review by domestic tax administrations or as a result of a bilateral transfer pricing agreement cannot then be questioned by a company that is required to account for any top-up tax such as a UPE applying the income inclusion rule. 

Transactions between entities located in the same jurisdiction do not generally have to be at an arms-length basis given the jurisdictional blending rules would apply anyway to offset any adjustments. There are a couple of exceptions to this general rule:

(1) where the transactions involve an excluded entity, an investment entity or a minority-owned entity (as the latter two would not be subject to jurisdictional blending anyway); and 

(2) where domestic transactions give rise to a capital loss. 

Unilateral Transfer Pricing Adjustments