Changes and developments in transfer pricing: What do they mean for businesses operating internationally?

What are the key changes and developments in transfer pricing today and how do these interact with the broader international tax landscape? 

Let’s start with scrutiny and compliance around transfer pricing. This is a major theme – both in the UK and overseas – due to: 

• Significant changes to legislation and guidance since 2015. In the UK, there have been significant legislative changes over the last ten years as well as HMRC releases every year since 2023, and much of this is mirrored overseas 
• More clued up, joined up tax authorities. They’re talking to each other across borders and using various data points and sources to build pictures of transfer pricing frameworks. For example, tax authorities will look at your patent box and R&D claims, statutory accounts and PAYE data to build a picture of your transfer pricing framework across the group 

In this environment, granular documentation is a must. 

As a rule of thumb, if you have international transactions between group entities – irrespective of size – there’s a high likelihood you’ll need to prepare some form of transfer pricing documentation. 

It could be a master file, local file or something proportionate to the size and complexity of your business. Whatever it is, it must have substance over form. Yes, legal agreements are still essential, but tax authorities now look beyond contractual arrangements to what’s really happening on the ground. They want to see who’s doing what and where. 

Underlining this point, HMRC recently provided over 100 pages of guidance (as part of its 2024 Guidelines for Compliance) on its expectations when it comes to transfer pricing documentation, processes and governance.  

Pillar 2 are the new global minimum tax rules that apply to multinational groups with revenues of €750 million or more. The aim of the rules is to set a 15% minimum effective tax rate. 

This means that if you’ve used transfer pricing to move profits between jurisdictions to get to an “arms length” result, this may affect the amount of top-up tax imposed by a jurisdiction to bring the effective tax rate up to 15%. So, transfer pricing can have a big influence on your Pillar 2 calculations, and it can also add complexity to any year end transfer-pricing adjustments. 

Transfer pricing also overlaps with Pillar 1 and, as part of its Pillar 1 project, the OECD has introduced Amount B, a simplified, standardised approach to pricing that the OECD calls “baseline marketing and distribution activities”. For some routine distribution companies, this can, for example, provide a straightforward way to determine arms-length profits, potentially reducing the need for detailed transfer pricing analysis and bespoke benchmarking studies. 

This is a key area where transfer pricing closely intersects with international tax. 

A permanent establishment occurs when a business has a taxable presence but not a local legal presence in an overseas jurisdiction. This usually triggers local tax filings and taxes on a proportion of the profits – and these profits should be determined under transfer pricing rules. 

The rules around permanent establishments are subjective and complex, but in simple terms, they largely depend on whether you are operating in an overseas jurisdiction through a place of business or have people on the ground undertaking sales-generating activities on your behalf. 

With increasingly mobile workforces, it’s now commonplace for businesses to have people dotted around the world. Some are employees and some may be contractors, for example working through an employer of record organisation, and they travel and relocate frequently. In this environment, there is invariably complexity over corporate and personal tax, so careful consideration and planning is a must. However, it is often overlooked. 

Over the past ten years, as part of an attempt to align international tax rules globally, we have seen a concerted effort to achieve alignment and consensus over what a permanent establishment is and how it is triggered. While there has been progress towards a global consensus, the pace and nature of implementation by local tax authorities remains inconsistent and often slow. Those expanding overseas should bear this in mind. 

Many businesses are keen to understand what safeguards they can put in place to mitigate permanent establishment risk. In practice, it’s hard to remove the risk entirely while also working in a way that’s best for the business, but there are practical safeguards that can reduce the risk of any potential financial exposure. These can include: 

• Basic measures, such as maintaining and monitoring travel records for mobile employees 
• Carefully considering how relocations and secondments are structured 
• Establishing policies and internal governance around authority levels and the roles and responsibilities of employees and contractors working overseas 

The message is clear: Fast-changing international tax rules mean businesses must establish transfer-pricing frameworks that are both technically rigorous and able to withstand scrutiny.