It’s fascinating to see how the global minimum tax rule of the OECD/G20’s Pillar Two initiative is steadily reshaping tax narratives across the world—even in countries long known for low or no corporate taxes.
The reform’s policy design integrates individual jurisdictions’ economic interests with international alignment. As multinational enterprises respond to Pillar Two’s implementation, transfer pricing will increasingly become a critical tool in navigating its planning and compliance landscape.
The core tax dynamic for decades has been that multinationals shift profits to low-tax jurisdictions to optimize their global tax footprint, while countries compete for that footprint by cutting tax rates to attract investment. This led to what’s often called a race to the bottom.
As jurisdictions continued lowering rates to stay competitive, global average statutory tax rates dropped from around 40% in 1980 to just over 23% in 2020. But Pillar Two aims to interrupt this race.
The global minimum tax tries to tax profits where economic value is created. The idea is simple: If a multinational’s effective tax rate in any jurisdiction falls below 15%, a “top-up tax” kicks in. This erodes the advantage of profit shifting by ensuring that non-routine or excess profits, which usually are the ones shifted to tax havens, face a minimum level of taxation somewhere.
Why would low-tax countries, especially those still under the 15% threshold, willingly implement the qualified domestic minimum top-up tax, or QDMTT, if that would undermine their traditional tax attractiveness? Because if they don’t tax it, someone else will.
By adopting QDMTT, low-tax countries make a strategic move. They ensure that any Pillar Two top-up tax liability arising on low-taxed profits is collected domestically, rather than getting scooped up by a parent jurisdiction via the income inclusion rule, or IIR. It’s a defensive yet sovereign play that seeks to protect the domestic tax base in a world of tighter, coordinated rules.
Instead of resisting the tide, countries are using QDMTT to anchor their taxing rights. This move reflects a new understanding that international alignment and national interest can coexist. These jurisdictions are no longer mere tax havens; they’re evolving into tax administrators with a stake in the broader framework.
Pillar Two doesn’t target all profits equally. It focuses on excess profits, leaving out routine returns through the substance-based income exclusion. That’s critical, because most profit shifting historically has targeted excess profits—not those rooted in local employment, tangible assets, or real operational activity. So although the global minimum tax seems like a restriction, it’s a fair reallocation of taxing rights.
While the global minimum tax limits profit shifting, it also could unintentionally intensify competition for real investment. Countries may double down on other incentives, such as grants or subsidies, to remain attractive. But even here, the larger goal stands: encouraging investment where value is created, not where tax is light.
For multinationals, this signals a turning point. Global consensus means no arbitrage. Whether through QDMTT or IIR, top-up taxes will find their way. Multinationals’ focus must shift to strategic readiness—robust Pillar Two impact assessments, effective tax rate forecasting, transfer pricing alignment, and transparent intercompany pricing models.
From a transfer pricing standpoint, reassess whether existing transfer pricing models result in low effective tax rates that may trigger top-ups in any jurisdiction. Integrating effective tax rate modeling into transfer pricing planning is essential to understanding how intercompany pricing influences jurisdictional outcomes.
While transfer pricing applies at a transactional or entity level and Pillar Two functions at a jurisdictional level, both align profits with value creation.
This is why transfer pricing outcomes, particularly in low-tax jurisdictions, must reflect real functions, assets, and risks through a robust functional analysis of local entities. Entities with fixed transfer pricing remuneration models—such as contract manufacturers, limited-risk distributors, contract service providers—may require recalibration, as they may attract top-ups if remunerations are fixed but effective tax rates fall below 15%.
Where persistent exposure remains, structural changes such as supply chain realignment, intellectual propertly ownership restructuring, or reallocation of key functions may be necessary.
Coordinate with tax accounting teams to align GloBE income, covered taxes, and deferred tax treatments within the transfer pricing framework. Ensure that the information disclosed in the country-by-country report, master file, and local file presents a 360-degree view that not only supports transfer pricing compliance and tax positions but also demonstrates Pillar Two readiness.
Transfer pricing and Pillar Two both reinforce the principle that profits must align with value. Here’s how they compare.
Transfer pricing already rested on principles of value creation and economic substance. Now, it must evolve with global minimum tax dynamics. We’ll likely see more interplay between transfer pricing and Pillar Two—especially around delineation of income, entity characterization, and reassessment of intellectual property and procurement hubs.
This is in many ways a recalibration from tax-motivated structures to sustainably aligned ones. And it’s not just about following rules; it’s about redesigning how profit, policy, and purpose intersect in the global economy.
The global tax order is changing. Multinationals that understand the direction of travel and proactively adapt will find themselves ahead of the curve, rather than caught in it.
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
Praneeth Narahari is a transfer pricing partner at Steadfast Business Consulting.
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