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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

The Pillar Two Rules include special provisions that cover unilateral transfer pricing adjustments. These arise where one country’s tax authority may make a transfer pricing adjustment without this being reflected in the partner jurisdiction. 

The net effect of the provisions is that unilateral adjustments are permitted providing the adjustment doesn’t impact the profits of a low-taxed jurisdiction. A low-taxed jurisdiction is a jurisdiction with a nominal tax rate below 15% or where the Pillar Two GloBE ETR was less than 15% in each of the previous two-years.

The reason for excluding adjustments in low-taxed jurisdictions is that if the corresponding adjustment was made in a high-taxed jurisdiction it wouldn’t be taxed under either the GloBE rules (as the ETR is above 15%) or domestically.

We include a detailed example of the effect of the Pillar Two GloBE rules on unilateral transfer pricing adjustments at: Pillar Two Arms-Length Requirement



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