Transfer Pricing: Pillar 1

Abstract

Because of the increasing digitalization worldwide, questions have been asked if the current taxation including today’s transfer pricing rules are outdated and not compatible with the the world that we are living in today. This thesis seeks to define the impact of Pillar 1 on the implied groups, which will be covered by the new act. Pillar 1 intents to implement a tax system that is more integrated with the still growing digitalized economy. This should be realized through a new allocation norm based on a formula to market jurisdictions (Amount A) together with a fixed profit defined by OECD based on the arm’s length principle on baseline activities Amount B. Furthermore the thesis make the conclusion of the impact through a comparison of the profit allocation according to the current rules compared to the profit allocation according to Pillar 1. The thesis also illustrates the economic consequence of Pillar 1 on the Danish groups within the scope of Pillar 1. The conclusion is clear. Pillar 1, and in particular Amount A, will have a great impact on the payable tax amount for the groups and also the allocation of the tax amount to pay. Because of Denmark’s large export and companies with a significant amount of intangible assets the Danish government expects that the implementation of Pillar 1 won’t be a lucrative law seen through Danish eyes because a significant tax amount which until today have been paid in Denmark will be re-allocated to other countries. The conclusion of the thesis is that the current rules on taxation of multinational companies does not allocate income in an acceptable way, as no profit is allocated to market jurisdictions where the multinational companies do not have physical presence. Pillar 1 will seek to solve this problem through Amount A and Amount B. However, Pillar 1 is still in working progress as some aspects of the action plan is not finalized and is therefore still unclear. If Pillar 1 is implemented this will have a great impact on the implied parties. From the analysis in this thesis, the implementation of Pillar 1 will contribute with a major change in the allocation between the routine profit and the residual profit. Furthermore, a new allocation amount in form of Amount A will be distributed to market jurisdictions that didn’t receive any part of the profit allocation before Pillar 1.