G7 Relaxes Pillar Two Implementation: Challenges for Transfer Pricing Policies

The recent G7 agreement introduces a “side-by-side” approach to Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), allowing countries to apply their own national rules if deemed equivalent to the global minimum tax rules. This decision may delay uniform implementation of the 15% minimum tax and adds complexity for multinational groups.

Context

The 2021 agreement, endorsed by over 140 countries under OECD auspices, was based on two pillars:

• Pillar One: Redefines taxing rights for large multinationals (particularly digital giants) based on where consumers are located, not just where companies are headquartered.
• Pillar Two: Introduces a global minimum effective tax rate of 15% for multinational groups with consolidated revenues over €750 million to prevent a race to the bottom in tax rates.

The G7’s “side-by-side” approach allows countries like the U.S. to apply their own domestic rules to tax their multinationals (instead of facing top-up taxes from other countries), provided those rules are considered “equivalent” to the Pillar Two framework.

This move, largely driven by the U.S., aims to have its GILTI (Global Intangible Low-Taxed Income) regime recognized as compliant with Pillar Two, thereby preventing additional taxes on U.S. subsidiaries operating in Europe.

The core aim of Pillar Two is to discourage profit shifting to low-tax jurisdictions. However, the G7’s agreement softens the international pressure for a single standard and opens the door to national interpretations.

In practice, this could lead to discrepancies in what each country considers a qualifying minimum tax, increasing complexity for multinationals that must align transfer pricing policies with differing local realities.

Transfer Pricing Implications

This evolving scenario poses several challenges and opportunities for multinational enterprises:

• Review of tax structures: Companies must assess whether their current structures remain efficient and consider potential reorganizations to optimize tax positions under the new system.

• Alignment with economic substance: Transfer pricing policies must accurately reflect the economic reality of operations, particularly in jurisdictions with equivalent regimes. This is especially relevant in countries like Spain, which strongly support Pillar Two and aim to ensure increased tax revenue.

• Greater complexity and regulatory divergence: With national “equivalent” regimes coexisting alongside Pillar Two rules, multinationals will face discrepancies in how minimum taxation is calculated, potentially leading to inconsistencies in transfer pricing outcomes.

• Increased scrutiny by tax authorities: Countries committed to Pillar Two, such as Spain and other EU jurisdictions, may intensify audits and reviews of intra-group transactions to prevent base erosion.

• Documentation and compliance: The coexistence of domestic and international standards demands greater diligence in documentation and policy enforcement to avoid double taxation or penalties.

How ALS Transfer Pricing Can Help

At ALS Transfer Pricing, we understand that the “side-by-side” approach to Pillar Two adds complexity and tax risk for multinationals. That’s why we offer a comprehensive, specialized service to help you navigate this challenge:

1. Impact Analysis of Pillar Two on Transfer Pricing

We perform a tailored assessment of your operations to identify jurisdictions at risk of global minimum tax adjustments.

We evaluate differences between national equivalent regimes and standard Pillar Two rules, identifying inconsistencies in your transfer pricing policies.

2. Review and Redesign of Transfer Pricing Policies

We adapt your policies to meet the new regulatory landscape, ensuring compliance with both the arm’s length principle and Pillar Two requirements.

We provide strategic recommendations to optimize the allocation of functions, assets, and risks within your group.

3. Robust and Adapted Documentation

We produce reports and benchmarking studies that demonstrate the economic substance of your operations, ensuring consistency with Pillar Two requirements and tax authority expectations in countries like Spain.

4. Ongoing Monitoring and International Support

We keep our clients informed in real time on regulatory updates related to Pillar Two and broader BEPS developments.

Our international network enables us to advise on operations across multiple jurisdictions with a consistent and coordinated approach.

At ALS Transfer Pricing, we’re committed to delivering solutions that go beyond compliance—we aim to be your strategic partner in protecting profitability, reducing tax risk, and strengthening your position in an increasingly complex global tax environment.