Transfer Pricing Disputes Under Pillar Two Demand Sharp Data

Tax departments seek certainty and efficiency as businesses address implementation of OECD Pillar Two rules in more than 50 countries. The impact of Pillar Two uncertainty combined with robust and informed taxing authorities is driving more companies to turn to advance pricing agreements and mutual agreement procedures than at any time in the past 30 years.

Yet many may lack an overarching controversy strategy and the data to participate in these forums efficiently. Transfer pricing leaders must focus their attention and approach to remain agile in a Pillar Two world and take action to address transfer pricing audits and double taxation risk.

Pillar Two rules call for intercompany transaction symmetry between jurisdictions, and the minimum tax rate component of the Pillar Two rules creates a cliff effect. This combination places pressure on companies to seek certainty and target a degree of precision with respect to country-specific calculations.

Countries also need revenue and are increasing enforcement enabled by technology, sparking a flurry of tax controversy activity. Further, changes in tax policy arising from each jurisdiction’s application and implementation of Pillar Two or other local regulation changes may lead to more scrutiny of data and calculations used to determine transfer pricing positions.

Given these developments, it’s no surprise the EY 2024 International Tax and Transfer Pricing Survey found an overwhelming majority (84%) of respondents saw the new rules creating a risk of double taxation and specifically worried about effective tax rate instability and the level of precision new calculations require.

Rise of APAs

Until now, APAs and MAPs have been underused because the negotiation process was viewed as too slow, according to earlier iterations of the survey.

Now with controversy on the rise, and businesses facing potentially lengthy litigation and audit time lines, the proportion of respondents looking to APAs as a tool for predictability and certainty of their transfer pricing positions has approximately doubled since the 2021 survey.

For example, in the 2024 survey, 61% said bilateral APAs will be very useful in managing transfer pricing-related controversy over the next three years, up from 34% in the 2021 survey. Fifty-nine percent said multilateral APAs will be very useful, up from 30%.

Data Readiness

Tax controversy is proving more common, invasive, and expensive for both businesses and tax administrators than in prior years. On average, respondents noted penalties, interest, and surcharges nearly equaled the total average amount of all inquiries and disputes. When legal fees, including growing litigation fees, are considered, it’s clear companies are looking for a path to certainty.

Companies’ longstanding concerns about safeguarding their transfer pricing positions are giving way to concerns about their data readiness. Overwhelmingly, respondents said “poor data quality” and ineffective use of technology was their first or second biggest challenge, and 73% say investing in technology would result in a moderate or significant improvement in risk management.

Data is a top concern because transfer pricing disputes typically focus on disagreements over facts and inconsistent data pulled from variant systems. When businesses lack control over this data—whether it’s internal, external, qualitative, or quantitative—disputes can linger and potentially become contentious (even litigious) and harder to settle.

The combination of concerns about double taxation and assertive, technology-enabled tax collectors forces tax leaders to prioritize using transfer pricing data and designing a transfer pricing policy with robust processes. Businesses need a holistic controversy strategy rooted in standardized data and transparent calculations supporting current transfer pricing positions that may face more intense audit scrutiny in the future.

Roadmaps Are Necessary

Whether considering an APA, facilitating a dispute resolution, or simply trying to comply with transparency initiatives and Pillar Two, businesses need a clear roadmap for standardizing tax and transfer pricing data so it can be efficiently accessed and analyzed.

Better data structure, analytics, and documentation will prepare businesses for new and complex tax reporting and improve the APA process. Most importantly, structured data facilitates more productive negotiations with and among tax authorities.

Transfer pricing audits will continue to evolve in sophistication as technology develops and businesses use more tools. Tax departments should take the following steps to meet demands of current and future transfer pricing audits and better manage double taxation risk.

Map future and current dispute resolution paths and treaty partners with an eye to certainty. Businesses that invest now in a multifaceted resolution approach to transfer pricing will be better-positioned to engage with tax authorities on future issues and be more likely to reach resolution quicker than their peers.

There are many ways to group intercompany transactions and resolve multiple types of intercompany transactions simultaneously. Businesses should reconsider how they bundle such transactions with certainty and risk in mind. This process means investigating the variety of pre-filing and dispute resolution programs offered by governments, particularly with the multi-year confidence of APAs.

Support dispute resolution plans with automation and standard data. Businesses should systemically standardize data and automate transfer pricing processes, with the ultimate goal of using generative artificial intelligence or other automation. Organizations that transform reported in the 2024 EY survey that they saved 30% of all hours spent on transfer pricing-related matters in the finance department in a five-year period.

Align transfer pricing and tax policies with the organization’s broader public face. Even as businesses seek year-over-year transfer pricing certainty with dispute resolution tools, it’s important to align tax positions with the business’s public face. Having processes to mine, monitor, and ultimately deploy this data also helps businesses respond to increasing demands for more transparency from other stakeholders about how and where they pay taxes globally or contribute to sustainability programs.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tracee Fultz is global transfer pricing leader at EY. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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