Global implementation of Pillar Two: Proposed amendment to IAS 12

David Baur Partner and Leader Corporate Reporting Services, PwC Switzerland Dec 22, 2022

What is the issue?

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 (the Global Anti-Base Erosion Proposal, or ‘GloBE’) to reform international corporate taxation.

Large multinational enterprises within the scope of the rules are required to calculate their GloBE effective tax rate for each jurisdiction where they operate. They will be liable to pay a top-up tax for the difference between their GloBE effective tax rate per jurisdiction and the 15% minimum rate.

For an overview of the Pillar Two model rules and their disclosure implications, refer to our previous publication. As noted earlier, applying the GloBE rules and determining their impact on the IFRS financial statements are likely to be very complex and pose a number of practical challenges. It is not immediately apparent how an entity would apply the principles and requirements in IAS 12 in accounting for top-up tax arising from the Pillar Two model rules – specifically, whether the recognition and measurement of deferred tax assets and liabilities would be impacted.

Having considered all of the potential challenges, the IASB recently discussed whether it should introduce a temporary exception from accounting for deferred taxes arising from legislation enacted to implement the OECD’s Pillar Two model rules. The Staff Paper that was brought to the November IASB meeting:

provided an overview of the Pillar Two model rules;
discussed the potential implications of the rules on accounting for income taxes applying IAS 12; and
asked the IASB whether it agreed to undertake narrow-scope standard-setting, introducing a temporary exception from the accounting for deferred taxes arising from application of the Pillar Two model rules.

The IASB agreed with the Staff proposal to undertake narrow-scope standard-setting. The next step would be to publish an Exposure Draft in January 2023 (with a 60-day comment period) and, subject to the comments received, issue final amendments to IAS 12 in the second quarter of 2023.

Provided that IAS 12 will be amended in the manner discussed in the Staff Paper, the temporary exception from the accounting for deferred taxes arising from application of the Pillar Two model rules would apply until such time as the IASB decides to either remove it or make it permanent. As part of the expected amendments, an entity might be required to disclose:

the fact that it has applied the exception; and
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. For example, they might need to disclose information about the legislation that has been enacted in jurisdictions in which they operate.

The amendments to IAS 12 will be applied immediately upon their issuance and retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

What is the impact and for whom?

The Pillar Two rules apply to multinational enterprises that have consolidated revenues of €750m in at least two out of the last four years. Although, at this stage, the impact for the majority of entities is typically a disclosure issue, as the rules become effective in different jurisdictions, the entities will need to consider the respective current tax consequences in their IFRS financial statements.

Provided that the proposed amendments to IAS 12 are published relatively early in 2023, entities will likely not need to consider any deferred tax implications of the Pillar Two rules.

When does it apply?

The Pillar Two rules are intended to be implemented as part of a common approach, as agreed by the OECD members, and to be brought into domestic legislation by 2023. However, each jurisdiction will need to determine if and when the rules will be enacted and effective. For example, in the United Kingdom the Pillar Two rules are currently planned to be enacted in 2023 and effective for accounting periods in 2024. The EU currently has plans to issue a directive to require its member states to enact the rules in 2023 with an effective date for accounting periods in 2024.

Therefore, assuming the proposed amendment is finalised in 2023, we expect the Pillar Two rules to impact financial statements of entities in 2023 for disclosure purposes and 2024 for current tax purposes, depending on the jurisdictions in which they operate.

Key points

In October 2021, the Organisation for Economic Co-operation and Development (OECD) released the Pillar Two model rules to reform international corporate taxation. See also our previous publication for more information on the topic.
At its meeting in November 2022, the IASB decided on standard-setting in response to the imminent implementation of the Pillar Two model rules.
It is likely that IAS 12 Income Taxes will be amended in 2023 to introduce a temporary exception from accounting for deferred taxes arising from application of the OECD’s Pillar Two model rules.

Contact us

David Baur

Partner and Leader Corporate Reporting Services, PwC Switzerland

Tel: +41 58 792 26 54