Transfer pricing and Pillar Two: why multinational businesses need to consider both

For multinational groups, transfer pricing has long been a cornerstone of international tax compliance. However, the introduction of the OECD's Pillar Two global minimum tax means businesses now need to understand how their transfer pricing policies can affect their wider tax position.

Although transfer pricing and Pillar Two are separate regimes, they are closely connected – and getting one wrong could have implications for the other.

Two different rules with a common objective

Transfer pricing governs how related companies within a multinational group price transactions between themselves. These transactions must be conducted on an arm's length basis, meaning they should reflect the prices that would be agreed between independent parties.

Pillar Two, by contrast, introduces a 15% global minimum effective tax rate for large multinational enterprises operating in participating jurisdictions. Rather than examining individual transactions, Pillar Two looks at the overall effective tax rate paid in each country where a group operates.

How transfer pricing influences Pillar Two

Transfer pricing determines where profits are recognised across a multinational group. As a result, it also influences the amount of tax paid in each jurisdiction.

For example, if a UK company charges another group company for management services, financing or intellectual property, those charges will affect where profits – and therefore tax liabilities – arise.

Under Pillar Two, those profit allocations feed directly into the calculation of each jurisdiction's effective tax rate. If profits are concentrated in a jurisdiction where the effective tax rate falls below 15%, the group may become liable for a top-up tax under the Global Anti-Base Erosion (GloBE) Rules.

Transfer pricing adjustments can have wider consequences

If HMRC or another tax authority successfully challenges a group's transfer pricing and adjusts its taxable profits, this could alter the effective tax rate calculations used for Pillar Two.

For example, an increase in UK taxable profits may increase the UK's effective tax rate while reducing profits in another jurisdiction. This can change the group's Pillar Two position and may require the business to recalculate its GloBE obligations.

This makes robust transfer pricing documentation more important than ever, not only to support compliance with domestic tax rules but also to minimise uncertainty under Pillar Two.

Pillar Two does not replace transfer pricing

A common misconception is that the global minimum tax makes transfer pricing less important.

In reality, the opposite is true.

Businesses still need to demonstrate that their intercompany transactions comply with the OECD Transfer Pricing Guidelines and UK legislation. Pillar Two simply adds another layer of compliance by considering whether the resulting profits have been taxed at an appropriate effective rate.

What should businesses do now?

Multinational groups should review their transfer pricing policies alongside their Pillar Two obligations to ensure the two work together effectively.

Businesses should consider:

• Reviewing existing transfer pricing policies and documentation.
• Ensuring intercompany transactions are supported by robust evidence.
• Understanding how transfer pricing decisions affect Pillar Two calculations.
• Preparing for increased scrutiny from HMRC and overseas tax authorities.

Taking a proactive approach can help businesses reduce risk, avoid unexpected tax liabilities and ensure compliance with an increasingly complex international tax landscape.

How HURST can help

HURST's specialist tax advisers work with UK and international businesses to develop robust transfer pricing policies, prepare compliant documentation and support clients through HMRC enquiries. We also help businesses understand how transfer pricing decisions may affect their wider international tax obligations, including Pillar Two.

Find out more about our Transfer Pricing services or contact our team to discuss your organisation's requirements.