Pillar Two Model Rules Disclosures under IAS 12

Background:

• In October 2021, more than 135 jurisdictions – representing more than 90% of the Global GDP – agreed to a major international tax reform. This reform involves a two-pillar solution.
• Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries.
• Pillar Two represents a tax system that is adopted by several countries that will ensure every Multinational Group with global annual revenue above 750 million Euros is subject to an effective tax rate of at least 15% or more in every jurisdiction where it operates.
• The idea behind this is to ensure that countries get their fair share of tax from companies earning within their borders.
• These rules raise several accounting questions including whether the Top-up Tax is an income tax in the scope of IAS 12 and, if so, when and how entities should account for the new taxes.
• The top-up tax is the difference between the minimum corporate tax rate (i.e., 15%) and effective tax rat and is imposed on the income earned by the MNE group’s constituent entity.

Amendments to IAS 12 Income taxes:

• On 23 May 2023, the International Accounting Standards Board (IASB) issued International Tax Reform – Pillar Two Model Rules – Amendments to IAS 12 (the Amendments).
• The Amendments clarify that IAS 12 applies to income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules. Such tax legislation, and the income taxes arising from it, are referred to as ‘Pillar Two legislation’ and ‘Pillar Two income taxes’, respectively.

Mandatory temporary exception:

• The Amendments introduce a mandatory exception in IAS 12 from recognizing and disclosing deferred tax assets and liabilities related to Pillar Two income taxes.
• However, they need to disclose that they have applied the relief.
• This exception applies immediately and retrospectively in accordance with IAS 8 Accounting Policies,
  Changes in Accounting Estimates and Errors.
• It will apply until the IASB decides either to remove it or to make it permanent.

Disclosure requirements:

Further, the IASB has introduced new disclosures, that companies are required to provide in their financial
statements from 31 December 2023. No disclosures are required in interim periods ending on or before 31 December 2023. The Amendments require an entity to provide information to users of financial statements before and after the Pillar Two legislation is in effect.

Once tax law is enacted but before top-up tax is effective-

• The company is required to disclose information that is known or can be reasonably estimated and that helps users of its financial statements to understand its exposure to Pillar Two income taxes at the reporting date.
• This information does not need to reflect all the specific requirements in the legislation – companies can provide an indicative range. Disclosures may include quantitative and qualitative information.

• Qualitative information: How the company is affected by Pillar Two taxes and in which jurisdictions
  the exposure arises – e.g., where the top-up tax is triggered and where it will need to be paid.
• Quantitative information: The proportion of profits that may be subject to Pillar Two income taxes
  and the average effective tax rate applicable to those profits, or how the average effective tax
  rate would have changed if Pillar Two legislation had been effective.

• If information is not known or cannot be reasonably estimated at the reporting date, then a company discloses a statement to that effect and information about its progress in assessing the Pillar Two exposure.

After the top-up tax is effective-

Only one disclosure is required – i.e., current tax expense related to top-up tax.

These new disclosure requirements apply only to financial statements from 31 December 2023. However, investors may expect disclosures about the potential impacts before then, particularly from group companies that expect to be liable for the top-up tax.

SW Point of View:

• The temporary exception provides entities with relief from accounting for deffered taxes in relation to this complex new tax legislation allowingstakeholders time to assess the implications.
• It also avoids entities developing diverse interpretations of IAS 12 that could result in inconsistent application of the standard.

Sahil Goyal, Audit Associate, SW India