How Transfer Pricing and BEPS Interconnect in Global Tax Planning

BEPS, Pillar Two, and Global Minimum Tax

Introduction

In today’s international tax environment, Transfer Pricing (TP) and the BEPS (Base Erosion and Profit Shifting) project have become two of the most influential forces shaping the global tax landscape. For multinational enterprises (MNEs), understanding how these frameworks interconnect is essential for building sustainable, compliant, and tax-efficient global structures.

BEPS and Transfer Pricing are not separate topics they are deeply intertwined, and together they shape the rules governing how profits should be allocated across borders.

This article explores how TP and BEPS interact, why they matter for global tax planning, and what multinational groups must do to ensure compliance.

1. Transfer Pricing as the Foundation of Global Profit Allocation

Transfer Pricing governs how profits are allocated among related entities in different countries.
The core principle is the Arm’s Length Principle transactions between related parties must be priced as if they were between independent parties.

Transfer Pricing covers:

  • Intercompany sales of goods

  • Shared services

  • Management fees

  • Royalties and IP licensing

  • Cost-sharing arrangements

  • Intercompany loans and guarantee fees

Before BEPS, many groups used TP planning to shift profits to low-tax jurisdictions through:

  • High-value IP structures

  • Service hubs

  • Favorable financing arrangements

  • Contract manufacturing models

These planning tools became the main focus of the BEPS initiative.

2. How BEPS Changed the Global Transfer Pricing Landscape

The OECD’s BEPS project—especially Actions 8–10 and 13—redefined the boundaries of Transfer Pricing.

Key BEPS Impacts on TP:

2.1 Substance Over Legal Form

BEPS made it clear that profits must follow real value creation.
Structures based purely on paperwork, tax residency games, or artificial arrangements are no longer acceptable.

2.2 Recharacterization of Transactions

Tax authorities now have the power to:

  • Recharacterize intra-group transactions

  • Disregard transactions lacking commercial rationale

  • Challenge pricing not supported by functions, assets, and risks

2.3 Enhanced Documentation Requirements

BEPS Action 13 introduced:

  • Master File

  • Local File

  • Country-by-Country Report (CbCR)

This dramatically increased transparency for tax authorities.

2.4 Focus on Intangibles and Risk Allocation

MNEs must now prove:

  • Who truly controls risks

  • Who develops and exploits IP

  • Whether the entity receiving large profits has real staff, systems, and decision-making power

BEPS made “shell companies” and “IP boxes without substance” extremely risky.

3. Why Transfer Pricing and BEPS Are Now Inseparable

3.1 Transfer Pricing Is the Enforcement Tool for BEPS

BEPS provides the framework.
TP rules provide the mechanism for reallocating profits.

A multinational cannot implement BEPS compliance without fully aligning its Transfer Pricing model.

3.2 BEPS Requires TP Policies to Reflect Real Functions and Risks

TP used to be more lenient about paper contracts.
After BEPS, tax authorities examine:

  • Actual operational behavior

  • Who performs key functions

  • Who actually controls strategic risk

  • Whether the “profit centers” are real or artificial

This turned TP into a substance-driven exercise.

3.3 Global Minimum Tax (Pillar Two) Reinforces TP Importance

Pillar Two introduces a 15% global minimum effective tax rate (ETR).
As a result, MNEs must ensure:

  • Transfer Pricing does not push profits into low-tax jurisdictions

  • Group-wide ETR remains above 15%

  • IP, financing, and service centers satisfy substance requirements

TP adjustments can now trigger top-up taxes under the Global Minimum Tax.

4. Practical Implications for Multinational Tax Planning

4.1 Intercompany Models Must Be Justifiable

Groups must revalidate:

  • Principal entities

  • Regional headquarters

  • Service hubs

  • IP holding companies

  • Procurement and logistics centers

Substance must match the profit levels.

4.2 Documentation Must Be Bulletproof

Authorities worldwide increasingly request:

  • Functional analyses

  • Benchmarking studies

  • Economic substance evidence

  • Value chain descriptions

Weak documentation = high audit risk.

4.3 TP Policies Must Align with BEPS and GMT

Common challenges include:

  • Misaligned service charges

  • Royalty payments not backed by IP development

  • Low-substance entities receiving excessive margins

  • Artificial cost-sharing arrangements

These items are now red flags.

4.4 TP Adjustments Can Affect Pillar Two ETR

The interaction between TP and Pillar Two means:

  • A TP adjustment in one jurisdiction can push ETR above or below 15%

  • Incorrect TP pricing may trigger top-up taxes

  • Transfer Pricing has become part of minimum tax planning

This is a major shift in global tax strategy.

5. Building a BEPS-Aligned Transfer Pricing Strategy

To comply with BEPS and maintain tax efficiency, multinationals should focus on:

1. Mapping their global value chain

Identify where value is created, not just where entities are located.

2. Ensuring substance in key jurisdictions

Especially for:

  • IP

  • Treasury

  • Shared service centers

  • Distributors and manufacturers

3. Reviewing intercompany agreements

Align contracts with real economic behavior.

4. Updating TP documentation annually

Master File, Local File, CbCR.

5. Using technology for data tracking

BEPS and Pillar Two reporting need:

  • Clean data

  • Automated systems

  • Consistent ERP outputs

Conclusion

Transfer Pricing and BEPS are now inseparable pillars of modern tax planning.
For multinationals operating in today’s high-transparency environment, success depends on aligning TP policies with BEPS principles and ensuring substance, documentation, and global consistency.

The future of global tax planning is clear:
fair allocation, transparent reporting, and substance-driven structures.

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