The Icelandic Ministry of Finance and Economic Affairs has launched a public consultation, open until August 5, 2025, on the draft bill that would establish the core provisions of Pillar Two of the OECD/G20 Inclusive Framework in its domestic legislation to implement a global minimum effective tax rate of 15% on the profits of multinational groups.
Although Iceland is not currently a member of the European Union, the bill follows the structure and terminology established in Directive (EU) 2022/2523, promoting technical alignment with the current international standard.
Key Elements of the Icelandic Draft Bill
- Application of the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-up Tax (QDMTT)
- The proposed regime provides for the entry into force of both rules on January 1, 2026, applicable to tax periods beginning after December 31, 2025.
- The IIR requires the parent entity to pay tax on the difference between the minimum rate and the effective rate generated in the jurisdictions of its subsidiaries.
- The QDMTT ensures that Iceland collects the additional tax internally before another jurisdiction demands it through the IIR.
- Exclusions and Simplification Measures
- The calculation excludes certain taxes, such as those applied to controlled foreign companies and withholdings on intra-group dividends.
- Safe harbor mechanisms are incorporated, which simplify compliance for groups exceeding certain thresholds of effective rate or revenue volume.
- The Undertaxed Profits Rule (UTPR) is not yet included
- Although recognized within the OECD framework, the UTPR has not been included in this first legislative phase, suggesting a gradual implementation.
- Reporting and Transparency Obligations
- Entities must report the top-up tax calculation in compliance with the OECD’s reporting standard, which will require accounting and tax reliability at the group level.
Relevance of Pillar Two for Transfer Pricing
Although Pillar Two does not directly amend the Transfer Pricing principles, its implementation will have significant tax and operational effects on intra-group pricing policies, particularly in:
- Interaction between the effective rate and profit allocation: Transfer Pricing methods determine the distribution of income and margins within the multinational group. Since the calculation of the effective tax rate (ETR) under Pillar Two is based on accounting profits adjusted by jurisdiction, any Transfer Pricing adjustment altering the tax base may affect the obligation to pay additional tax (top-up tax).
- Consistency among tax reports: The figures used in the local Transfer Pricing documentation (Local File), the Master File, and tax returns must be consistent with GloBE (Global Anti-Base Erosion Rules) reports.
Inconsistencies among them may trigger reviews or audits in the source and target jurisdictions.
- Risk assessment for aggressive tax planning: Pillar Two aims to discourage the use of artificial structures located in low-tax jurisdictions. Transfer Pricing policies should more accurately reflect the economic substance of transactions, particularly in intermediate financial centers.
- Review of intra-group financial structures: Intra-group payments (interest, royalties, service charges) will be subject to scrutiny if they intend to reduce the ETR below the 15% threshold. Companies will need to reevaluate their structures if these payments generate adverse effects under the new regulations.
Strategic Recommendations
Due to this new regulatory scenario, multinational groups located in or subsidiaries in Iceland should:
- Analyze the preliminary Pillar Two effects on their consolidated effective rate by jurisdiction and identify potential exposures to top-up tax.
- Review current Transfer Pricing policies, corroborating that assigned margins are supported by actual functions, risks assumed, and assets employed.
- Ensure the traceability and consistency of the information reported in Transfer Pricing Documentation, GloBE reports, tax returns, and financial reports.
- Actively participate in public consultation, particularly if existing structures need to be adapted or if regulatory risks are identified arising from the current design of the operation
Conclusion
The progressive adoption of Pillar Two in jurisdictions such as Iceland demonstrates global progress toward a more harmonized tax system less susceptible to base erosion. For multinational firms, the correct interaction between Transfer Pricing and global minimum tax regulations will be determinative not only in mitigating tax contingencies but also in ensuring a solid position vis-à-vis tax authorities.
Technical coordination among Transfer Pricing, accounting, and tax planning teams will be essential to navigate this new regulatory environment successfully. Anticipation and strategic preparation are already becoming the cornerstones of compliance.
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Source: Island.is