For companies that do business across borders, how their earnings are taxed is set to go through changes this year. New requirements in place from the Organization for Economic Co-operation and Development (OECD) and inclusive framework on the base erosion and profit shifting (BEPS) project introduce various new tax regimes under Pillar Two, including a new global minimum tax of at least 15% for multinational enterprises.
Pillar Two, as defined by the OECD, addresses “the tax challenges of the digitalisation of the economy that was agreed by 137 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS and endorsed by the G20 Finance Ministers and Leaders in October 2021... The Pillar Two Model Rules are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate.”
According to the 1,000 tax professionals surveyed by EY in their 2024 international tax and transfer pricing survey, this is a cause for worry. Many are concerned that discrepancies between collectors will result in double taxation. Eighty-four percent of those surveyed said they face a moderate or significant risk of double taxation due to new efforts by governments across the globe to change corporate tax codes.
Risk Evaluation
Over the next three years, tax leaders are preparing for the rise of transfer pricing risks. On top of double taxation fears, those surveyed by EY cite a variety of issues that could impact their organization’s ability to adequately forecast a large portion of their tax bill when it’s time to pay.
Over three-quarters (78%) said they believe the execution of operational transfer pricing is a risk. Just under three-quarters named risks around intellectual property laws, with 74% naming location, ownership of assets, and control of risk as a risk factor, alongside another 73% who said the royalties and licensing fees are significant producers of risk around transfer pricing.
To prepare for changes such as global minimum tax rates, BEPS adjustments, and other changes brought about by Pillar Two tax implementation, those in charge of transfer pricing and international tax are taking a proactive approach to be compliant while preparing for bumps along the way.
Advanced pricing agreements (APAs) are much more common among these professionals, so their organizations can have a better idea of the tax burden they are responsible for down the line. The interest and use of APAs have nearly doubled since last year, according to the data.
Sixty-one percent of transfer pricing leaders said bilateral APAs will be very useful, something only 34% said in 2021. A nearly identical (59%) amount said multilateral APAs would also be very useful. In 2021, only 30% said the same.
Unilateral advance pricing procedure interest more than doubled within the same time frame too, with only 29% saying this was an area of interest three years ago. This time around, that figure is up to 59%.
Standardizing the Data and Technology
With so many different methods and providers available to extract, process, and produce data sets, survey participants made it clear there is a desire for some type of uniformity when it comes to how data is collected and presented.
According to the survey, poor technology and data quality are not only increasing organizational risk factors but also making a cumbersome, dynamic process that much more difficult.
Three-quarters (75%) said ineffective technology was either their first or second biggest challenge in transfer pricing. Over two-thirds (67%) said poor data quality was in their top two challenges. Investments in technology to help supplement the workload associated with transfer pricing would help improve risk management efforts and help remedy some of these concerns, according to just under three-quarters (73%) of respondents.