Sean Faulkner, Co-Managing Partner of Valentiam Group

The previous installment, Preparing for Pillar Two (links to blog), touched on the tremendous data requirements of the GloBE Information Return (“GIR”) under the OECD’s new Global Anti-Base Erosion (“GloBE”) rules, portions of which are already being adopted by tax authorities worldwide. The OECD understands that the GIR requirements have the potential to be very burdensome, particularly as new countries adopt the rules over time. Given this, the OECD has provided for temporary safe harbors that taxpayers can apply to reduce the top-up tax in a particular jurisdiction to zero, provided that certain criteria are met.

The Country-by-Country report Safe Harbor (“CbCR Safe Harbor”), if selected by a qualified taxpayer, can greatly reduce the amount of data that is required and thus the resulting compliance obligation (see “Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two)”, published by the OECD in December 2022).

This article will not get into the details of the qualification criteria or how the calculations work, but instead it will focus on one important aspect of the CbCR Safe Harbor which is directly related to transfer pricing. In its December 2023 Administrative Guidance release, the OECD addressed an issue relating to transfer pricing adjustments, stating:

“Making adjustments to the data drawn from Qualified Financial Statements in a CbC Report for a jurisdiction would disqualify a Tested Jurisdiction from the Transitional CbCR Safe Harbour, regardless of whether such adjustments were intended to make CbCR data more consistent with the GloBE Rules.”

Many taxpayers, particularly those that established targeted returns for their manufacturers and distributors, will set their transfer prices at the beginning of the year, then make periodic true-up adjustments throughout the year, and often make a final adjustment after year-end.  Depending on the size of the adjustments, this can have a material impact on the profitability, and amount of tax due, for the local entities.

According to the new Administrative Guidance, these types of year-end adjustments, if not accurately reflected in the Qualified Financial Statements on which the CbC Report is based, will disqualify the entity from taking advantage of the Transitional CbCR Safe Harbor during all transition years through 2027 (if a taxpayer does not participate in the first year, it cannot participate in any future year). Depending on the timing of the adjustment, there may also be a risk of the adjustment not counting towards the minimum tax framework, potentially leading to double taxation.

Minimizing post-year end adjustments requires a robust operational transfer pricing process but can drive several benefits for a company – have better insight into profitability and taxes across all jurisdictions, reduce customs and VAT leakages, and be able to better respond to the challenges that are sure to come from Pillar 2 by taking advantage of the transitional safe harbors.

The PlaidCloud software solution is an ideal platform for large companies to automate and optimize their operational transfer pricing. With the flexibility to model any transaction flow and extract information from multiple ERPs, PlaidCloud reduces the need for year-end adjustments by monitoring and adjusting transfer prices throughout the year. Want to learn more? Start with a conversation. Contact PlaidCloud today >