International tax architecture has undergone a profound transformation with the establishment of the BEPS 2.0 project promoted by the OECD and the G-20. This reform framework seeks to modernize global tax rules to respond to the challenges of digitalization.
Traditionally, transfer pricing rules have focused on the arm’s length principle. However, BEPS 2.0 introduces a new set of rules through its two pillars:
BEPS 2.0: fundamentals and objectives
The BEPS (Base Erosion and Profit Shifting) project was designed to address gaps and mismatches in international tax rules that allow multinationals to shift profits to low- or no-tax jurisdictions, thereby eroding the tax base of other countries. BEPS 2.0 represents the second phase of this effort, seeking not only to mitigate tax erosion practices but also to reconfigure the criteria for the distribution of taxing rights and promote greater stability in the global tax system.
The two-pillar approach of the framework includes:
- Pillar One: Redefinition of nexus and profit allocation rules, seeking to ensure that countries where companies have users or customers (market) obtain taxing rights over part of the profits of multinationals, even if the multinational does not have a traditional physical presence.
- Pillar Two: Establishment of a 15% global minimum tax, applicable to large business groups with consolidated revenues above €750 million, with the aim of preventing harmful tax competition between jurisdictions.
Pillar One and its implication for transfer pricing
Allocation of profits beyond physical presence
The traditional logic of transfer pricing and international taxation is based on attributes such as physical presence, functions performed, assets used, and risks assumed within each jurisdiction. However, the growing importance of intangible assets and digital business models without a physical presence has limited the effectiveness of these traditional rules.
Pillar One introduces mechanisms that allow a significant portion of profits to be reallocated to the countries where multinationals generate income, regardless of their physical presence. The objective is for markets where substantial economic activities take place and real profits are generated to participate in the tax base of the relevant multinationals. In essence, this pillar modifies the traditional profit allocation rules, as set out in the OECD Transfer Pricing Guidelines, to better reflect the economic reality of global business.
One component of Pillar One is the so-called “Amount B”, which offers a simplified approach to the valuation of certain basic marketing and distribution activities within a country, applying the arm’s length principle in a consistent manner. This approach specifically responds to the need for jurisdictions—particularly those with less administrative capacity—to have clear and less complex rules for applying transfer pricing principles in relation to traditional marketing and distribution functions.
Interaction with transfer pricing
The implementation of Pillar One means that local transfer pricing rules must be adapted to integrate this new profit allocation criterion. Companies within the scope of application (generally large multinationals with significant revenues) will face a regime in which the tax bases of certain profits may be reallocated using new market metrics, in addition to the traditional criteria of comparability of transactions between related parties.
This change does not replace the transfer pricing approach, but rather complements and partially redefines it, especially for highly digitized or intangible-intensive business segments. Jurisdictions will need to modify their internal regulations and audit procedures to align with this new international standard.
Pillar Two: Global minimum tax and transfer pricing
Pillar Two focuses on establishing an effective minimum tax of 15% for multinationals with global revenues exceeding €750 million. This pillar is particularly relevant to transfer pricing policies due to its focus on ensuring that corporate profits are not subject to low or zero effective taxation due to aggressive transfer pricing structures.
GloBE rules and their impact
The Pillar Two rules, known as the Global Rules against Base Erosion (GloBE), interact with transfer pricing by regulating the consolidation of taxable income. These rules determine the Effective Tax Rate (ETR) for each jurisdiction; if that rate is less than 15%, a top-up tax will be applied in the jurisdiction of the parent company or another entity in the group.
This means that a group’s transfer pricing policies will have a direct impact on the determination of the global tax base, and poor planning could result in adjustments under the GloBE rules. Therefore, tax teams must consider transfer pricing policy and Pillar Two obligations together when designing international business structures.
Consistency with the arm’s length principle and transparency
One of the cornerstones of the BEPS framework is transparency and the alignment of taxation with the creation of real economic value. This is reflected in both Pillar One and Pillar Two and is closely linked to traditional transfer pricing rules. The arm’s length principle seeks to ensure that transactions between related parties are valued as if they were carried out between independent parties. BEPS 2.0 takes this principle to new levels by requiring that profit reallocations and the global minimum tax be articulated with economic criteria that reflect the real value generated in each jurisdiction.
In addition, coordination between these pillars and the Transfer Pricing Guidelines requires greater cooperation between tax administrations and greater clarity in country-by-country reports in order to correctly assess the income, functions, assets, and risks of each entity within a multinational group.
Implementation challenges and future prospects
The interaction between transfer pricing and BEPS 2.0 presents significant technical and regulatory challenges. On the one hand, countries must adapt their domestic laws and tax systems to incorporate the new profit allocation criteria without creating double taxation or legal uncertainty. On the other hand, multinational companies will have to reconfigure their transfer pricing and tax planning policies to comply with the arm’s length principle in a context where allocation rules and minimum taxation thresholds are stricter.
The complexity of these reforms suggests that adjustments will continue to evolve in the coming years, with possible reductions in Pillar One thresholds and refinements to Pillar Two rules to ensure consistent and effective application across jurisdictions.
Conclusion
The interaction between transfer pricing and BEPS 2.0 demonstrates an unprecedented integration of international tax criteria, where traditional rules are complemented by a global approach based on market-based tax rights and effective minimum taxation. Both Pillar One and Pillar Two have direct implications for how multinational companies design, document, and defend their transfer pricing policies, requiring a comprehensive review of their tax structures to ensure compliance with the arm’s length principle and the mitigation of top-up taxes, thereby reducing the risks of international tax adjustments.
Tax strategy in an increasingly demanding BEPS 2.0 environment
At TPC Group, we are a company specializing in transfer pricing that advises multinational groups on the evaluation and adaptation of their tax policies in the face of the challenges arising from BEPS 2.0. We support our clients in analyzing the impact of Pillars One and Two, redesigning transfer pricing structures, and managing compliance and tax dispute risks, with a technical, preventive approach aligned with OECD international standards and the Inclusive Framework guidelines.
Source: OCDE