The recent G7 agreement introduces a “side-by-side” approach for Pillar 2 of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), allowing countries to apply their own national rules if they are equivalent to the global minimum tax rules. This decision could delay the uniform application of the 15% minimum tax and increases complexity for multinational groups.
Background
The 2021 agreement, reached by more than 140 countries under the auspices of the OECD, consisted of two pillars:
- Pillar 1: Redefine taxing rights for large multinational corporations (with particular focus on digital giants) based on the location of their consumers, not only where the company is headquartered.
- Pillar 2: Introduce a global minimum effective tax rate of 15% for multinational groups with revenues exceeding €750 million, to prevent a race to the bottom in tax rates.
The G7 agreement adopts the new “side-by-side” approach, which allows countries like the United States to apply their own domestic rules to tax their multinationals (instead of other countries applying compensatory adjustments, known as “top-up taxes”), provided that these rules are considered “equivalent” to Pillar 2.
This has been driven mainly by the U.S., which seeks to have its tax regime (specifically GILTI, Global Intangible Low-Taxed Income) recognized as compliant with Pillar 2, thus preventing U.S. companies' subsidiaries in Europe from facing additional taxes.
The essence of Pillar 2 is to discourage profit shifting to low-tax jurisdictions. However, this agreement reduces international pressure for a uniform standard and opens the door to national interpretations.
In practice, this means there may be differences in how each country defines an effective minimum tax, increasing complexity for multinationals needing to align their transfer pricing policies with the realities of each jurisdiction.
Impact on Transfer Pricing
This new scenario presents several challenges and opportunities for multinational companies:
- Review of tax structures: Companies will need to assess whether their current structures remain efficient under the new system and consider potential reorganizations to optimize their tax burden.
- Alignment with economic substance: Transfer pricing policies must reflect the economic reality of operations, especially in jurisdictions with tax regimes deemed equivalent. This is particularly relevant in countries like Spain, which strongly support Pillar 2 and will seek to secure additional tax revenues.
- Increased complexity and regulatory divergence: With national “equivalent” regimes and Pillar 2 rules coexisting, multinationals will face differences in how the minimum tax is calculated across jurisdictions, potentially leading to inconsistencies in their transfer pricing analyses.
- Greater scrutiny and control by tax authorities: Countries that strongly support Pillar 2, such as Spain and other European jurisdictions, may strengthen their audit programs and intragroup transaction reviews to ensure no erosion of the taxable base occurs.
- Documentation and compliance: The coexistence of national and international rules will require greater diligence in transfer pricing documentation and compliance, to avoid double taxation risks or penalties.
How Can ALS Transfer Pricing Help You?
At ALS Transfer Pricing, we understand that the adoption of the “side-by-side” approach in Pillar 2 increases complexity and tax risk for multinationals. That’s why we offer a comprehensive and specialized service to help you face this challenge:
1. Analysis of Pillar 2 Impact on Transfer Pricing
- We conduct a tailored assessment of your operations to identify where there is a risk of adjustments due to the global minimum tax.
- We evaluate the differences between equivalent national regimes and the standard Pillar 2 rules, identifying potential inconsistencies in transfer pricing policies.
2. Review and Redesign of Transfer Pricing Policies
- We adapt your policies to the new regulatory landscape, ensuring they comply both with the arm’s length principle and the requirements of Pillar 2.
- We provide strategic recommendations to optimize the allocation of functions, assets, and risks within your group.
3. Robust and Tailored Documentation
- We prepare reports and benchmarking analyses that demonstrate the economic substance of your operations, ensuring alignment with Pillar 2 requirements and tax authorities’ expectations in countries like Spain.
4. Ongoing Updates and International Support
- We keep our clients informed in real time about regulatory changes in Pillar 2 and other BEPS framework developments.
- Our international network enables us to advise on operations across multiple jurisdictions with a consistent and coordinated approach.
At ALS Transfer Pricing, we are committed to offering solutions that go beyond compliance: we aim to become your strategic partner, helping you protect your profitability, reduce your tax risks, and strengthen your position in an increasingly complex global tax environment.
