Global Tax Shifts: Aligning Transfer Pricing with Evolving Business Models

Many articles have been written about how the pandemic affected the global economy. Organizations with global operations had to adapt transfer pricing and international tax rules to the unique circumstances of this period.   

As we emerged from the pandemic in 2022, we entered a period of inflationary pressures, high interest rates, and geopolitical conflicts that have presented a new set of challenges to multinational enterprises (“MNEs”). 

Here we explore some of the recent developments, regulatory changes, and some key industry trends. 

Transfer Pricing Regulations and Trends  

Launched in 2013, the Organization for Economic Cooperation and Development’s (“OECD’s”) base erosion and profit shifting (“BEPS”) project was designed to target tax strategies that allowed MNEs to artificially shift profits to low or no tax jurisdictions.  

Standardizing Transfer Pricing Documentation  

The BEPS project resulted in a move toward greater transparency in tax reporting. This is seen in the Action 13 report of the OECD’s BEPS project, which introduces a three-tiered standardized approach to transfer pricing documentation. This includes the country-by-country report (“CbCR”), the master file, and the local file. 

OECD’s Two-Pillar Solution  

More recently, the OECD introduced a two-pillar solution to address BEPS and “challenges arising from the digitalization of the economy.”  

Pillar 1 introduced Amount A, which allocates the routine profit above 10% among tax jurisdictions based on a formula. Notably, this allocation formula includes jurisdictions in which the MNE does not have a physical presence. Amount A applies to MNEs with revenues exceeding EUR 20 billion and profit margins of 10% or more.  

On February 19, 2024, guidance was released on a new approach for pricing baseline marketing and distribution activities within MNEs. This pricing approach, formerly known as “Amount B,” is now referred to as the Simplified and Streamlined Approach (“SSA”).  The SSA would replace the comparable benchmarking analyses currently required for transfer pricing compliance for eligible taxpayers and transactions. The SSA is not subject to a revenue threshold and has been proposed to apply to years beginning on or after Jan. 1, 2025. Additional guidance is expected from the OECD later this year. 

Pillar 2 applies to MNEs with revenues exceeding EUR 750 million. Pillar 2 is sometimes referred to as the “top-up tax” and focuses on entities taxed below 15% to ensure a minimum global effective tax rate. 

Artificial Intelligence’s Impact to Transfer Pricing  

In addition to these regulatory frameworks and impacts to local transfer pricing laws and regulations, rapid developments in Artificial Intelligence (“AI”) will likely alter the transfer pricing landscape, including benchmarking, preparation of reports, and review, and audit capabilities. 

Effects of Economic Indicators, Digitalization, and Increased Compliance Requirements  

It’s more important than ever to evaluate MNEs’ transfer pricing as a result of swings in global economic indicators, such as interest rates, foreign exchange rates, and supply chain pressures. Rapid changes to business models resulting from increased digitalization, labor shortages, inflationary pressures and other factors also need to be evaluated and documented frequently and contemporaneously.   

In the past, factual changes were less frequent and business structures were more rigid and, at times, stagnant.  As a result, transfer pricing policies and intercompany agreements needed to be reviewed less often and were less likely required to be updated or changed. 

The need for MNEs to evolve more quickly in a global and technologically driven economy to stay relevant, as well as fiscal pressures by governments to maximize tax revenues to balance budgets has led to increased transfer pricing compliance requirements, audit reviews, and potential assessments arising from global tax transparency. 

How to Navigate Changes in Transfer Pricing  

As a stakeholder in setting, reviewing, documenting, and defending an MNE’s transfer pricing position and policy, it is more important than ever to conduct an annual review of the functional, risk, and asset profile of your company and to thoroughly understand any changes in the value chain of your business.   

In the case of acquisitions or dispositions within the MNE, it’s critical to map out any material impact on the overall structure, document the changes, and evaluate the transfer pricing implications.   

Contemporaneous assessments that are documented at the time of a review are stronger support than post hoc analyses in an audit setting and should supplement a robust documentation file.   

If you have any questions or would like to discuss how we can assist you with your transfer pricing needs, please contact reach out to one of our professionals below.