Global Anti-Base Erosion or ‘’GloBE’’ rules are again going to be at the
forefront of international tax this year and it is an opportune time to revisit
how the rules interact with transfer pricing to avoid double taxation in case
of adjustments made by Tax Authorities.
On 9th October 2021, 136 countries agreed to implement a minimum corporate tax of 15% based on the Global Anti-Base Erosion or ‘’GloBE’’ rules for certain multinationals as part of a 2-pillar solution to the taxation of the digital economy.
The mechanism whereby the GloBE rules calculate the top-up taxes on profits relies on the effective tax rate (ETR) on a country-by-country basis hence the allocation of MNE profits between countries is an important backbone of the GloBE rules.
In working out the allocation of profits, the GloBE rules rely on the OECD Transfer Pricing (TP) Guidelines and require cross-border transactions undertaken between members of an MNE to be priced at arm’s length. Tax Authorities are allowed via provisions in their domestic Income Tax laws to adjust income or expense items where prices are not aligned with the arm’s length principle.
Where there are bilateral adjustments to the pricing i.e. the tax authorities of the participating entities to a transaction agree to the adjustments, a third-party tax authority will be required to accept the pricing.