Transfer pricing adjustments and Pillar 2 – when a TP adjustment requires a GloBE recalculation
A transfer pricing adjustment may require a recalculation under Pillar 2.
Transfer pricing adjustments imposed by tax authorities
A tax authority may determine a taxpayer’s income by disregarding conditions resulting from related-party links where the terms of a transaction differ from those that would have been agreed betweenunrelated parties and result in the taxpayer reporting lower income or a higher loss.
The consequences of such a determination do not necessarily end with an additional corporate income tax liability.
The arm’s length adjustment mechanism under GloBE
The Top-up Tax Act provides for an adjustment mechanism connected with the application of the arm’s length principle. Where the value of a transaction determined in accordance with the arm’s lengthprinciple differs from the value included in an entity’s financial accounting net income, the GloBE income may need to be adjusted accordingly.
Impact on CIT, GloBE income and jurisdictional ETR
An adjustment may therefore simultaneously affect:
– income subject to corporate income tax,
– the entity’s GloBE income,
– the amount of adjusted covered taxes,
– the effective tax rate (ETR) of the relevant jurisdiction.
Adjustments relating to prior years
Where a change relates to prior years and affects the effective tax rate, it may be necessary to recalculate the top-up tax for the periods covered by the adjustment. Additional top-up tax will arise, however, only where the recalculation results in an increase in the amount due.
A TP adjustment does not always result in double taxation
A transfer pricing adjustment does not therefore automatically result in a double burden consisting of corporate income tax and top-up tax. Its consequences depend, among other factors, on how the adjustment is recognised on both sides of the transaction, how income and tax are allocated to the relevant jurisdiction, and how the change affects the jurisdictional ETR.
Transfer pricing audits as a Pillar 2 risk
For groups within the scope of Pillar 2, a transfer pricing audit is no longer solely a corporate income tax risk. Every transfer pricing adjustment should also be analysed from the perspective of the GloBEcalculation.
Do your group’s tax procedures provide for an assessment of how TP adjustments affect GloBE income and the effective tax rate?
We can help assess whether a transfer pricing adjustment affects GloBE income, adjusted covered taxes and the jurisdictional ETR. We can also verify whether the adjustment requires the top-up tax to be recalculated. Get in touch with our team.
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