Pillar Two has not killed transfer pricing controversy. It has changed the venue.
The headline change is the global minimum effective tax rate of 15%. The less-discussed change is what happens to the remaining transfer pricing disputes.
Three observations from the first wave of Pillar Two implementations.
First, the substantive transfer pricing analysis still matters. A taxpayer that wins on the underlying arm's-length analysis wins under both regimes. A taxpayer that loses on the underlying analysis now loses twice.
Second, the dispute resolution venue has shifted. Administrative appeals processes are being used more aggressively, because the financial stakes are now larger.
Third, advance pricing agreements are more valuable than ever. The combination of a Pillar Two top-up tax and a transfer pricing adjustment is a double cost that an APA prevents.
The practical implication: taxpayers that invest in proactive APA negotiations now will avoid the dual-cost problem later.
Written by Roberto Ferreira, Partner.
This article is for general information only and is not legal advice.