Global implementation of Pillar Two: proposed amendments to IAS 12 -endorsement and enactment timing

David Baur Partner and Leader Corporate Reporting Services, PwC Switzerland 26/04/23

What's already happened?

In October 2021, more than 130 countries – representing more than 90% of global GDP – agreed to implement a minimum tax regime for multinationals, ‘Pillar Two’. In December 2021, the OECD released the Pillar Two model rules. For an overview of the Pillar Two model rules and their disclosure implications, refer to Global implementation of Pillar Two and the disclosure implications.

In November 2022, the IASB decided on standard-setting in response to the imminent implementation of the Pillar Two model rules. For details of the IASB decision to start a standard-setting, refer to Global implementation of Pillar Two: proposed amendment to IAS 12.

In January 2023 the IASB issued the Exposure Draft proposing amendments to IAS 12. The proposed amendments aimed to provide temporary relief from accounting for deferred taxes arising from the implementation of the Pillar Two model rules issued by the OECD. The proposed amendments included:

a temporary exception to the accounting for deferred taxes arising from the implementation of the rules; and
targeted disclosure requirements for affected companies.

Reporting entities would be exempt from recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes. As part of the expected amendments, an entity might be required to disclose:

the fact that it has applied the exception;
its current tax expense (if any) related to the Pillar Two top-up tax; and
during the period between the legislation being enacted and the legislation becoming effective, entities might be required to provide other targeted disclosures. The objective of the additional disclosures would be to give an indication of what the impact to the tax expense might be after legislation becomes effective.

What's new?

The comment period for the Exposure Draft was closed on 10 March 2023, and the next project milestone, according to the IASB’s work plan, would be the Exposure Draft feedback in April 2023. It is therefore likely that IAS 12 will be amended accordingly in the second quarter of 2023.

According to paragraph 98M of the Exposure Draft, the amendment to IAS 12 providing an exception to the requirements in the standard will be applied immediately upon their issuance (subject to any local endorsement processes) and retrospectively in accordance with IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

Key points

In January 2023, the IASB issued the Exposure Draft proposing amendments to IAS 12, ‘Income Taxes’. The amendments aim to provide temporary relief from accounting for deferred taxes arising from the implementation of the Pillar Two model rules.
It is likely that IAS 12 will be amended in the second quarter of 2023. Jurisdictions subject to an endorsement process will need to endorse the amendments.
Entities that need to consider the Pillar Two requirements before the IAS 12 amendments are endorsed might still be able to avoid recognition of deferred tax.

What is the issue?

Some entities might need to consider the Pillar Two requirements before the amendment is effective in their jurisdiction – for example, where a multinational entity within the scope of the Pillar Two model rules has a period end that falls between the following two points in time:

the date when Pillar Two legislation is enacted (or substantively enacted) in the entity’s jurisdiction, and
the date when the amendment to IAS 12 providing the exception for deferred tax accounting becomes effective or is endorsed (if there is any local endorsement process in the entity’s jurisdiction).

The question arises whether, in this case, the entity needs to recognise the deferred tax balances arising from the Pillar Two legislation in the absence of the IAS 12 amendment for just one reporting period, and then to reverse any deferred tax when the amendment to IAS 12 becomes effective? In answering this question, we consider that the following relevant:

there is an indication in the Basis for Conclusions of the Exposure Draft (at para BC10) that the IASB did not conclude whether there would be deferred tax implications if no exception was proposed. In fact, the Basis for Conclusions paragraph highlights that respondents were unclear as to whether and how IAS 12 would be applied, confirming that the existing requirements are unclear.

At this stage, since the existing requirements under IAS 12 are unclear, entities might need to develop an accounting policy in accordance with paragraph 10 of IAS 8. In developing that policy, entities might conclude that Pillar Two legislation does not require adjustments or additions to the existing deferred tax balances. In developing an accounting policy, an entity might consider:

the informational value that would be provided (relevance, reliability, faithful presentation) if the entity attempted to update deferred tax balances; it was noted by many stakeholders that recognising deferred taxes related to Pillar Two could be extremely complex and, therefore, the cost of doing so might outweigh the benefits (para BC11 in the Exposure Draft);
the recent FASB interpretation which applies a similar Framework to IFRS (refer to US In brief 2023-01 FASB staff weighs in on tax accounting for OECD Pillar Two taxes), which concluded that no additional deferred tax should be recognised as a result of Pillar Two; and
the upcoming amendment to IAS 12 that would make it clear that no deferred tax is permitted to be recognised as a result of Pillar Two; therefore, trying to estimate any deferred tax for one period, only to reverse it thereafter, does not seem to provide useful information.

Listed entities should take into account any views of their local regulator in developing an accounting policy.

Who is impacted and when?

Multinational enterprises within the scope of the Pillar Two model rules, who operate in a jurisdiction where Pillar Two legislation has been enacted or substantively enacted, might be affected. This is likely to be an issue for those who have a period end in March, April or May 2023 – or later in 2023, provided that the amendments to IAS 12 are not endorsed in that jurisdiction by that later date.

Contact us

David Baur

Partner and Leader Corporate Reporting Services, PwC Switzerland

Tel: +41 58 792 26 54