In March 2022, the Organisation for Economic Co-operation and Development (OECD) released guidance on its 15% global minimum tax proposed as the second ‘pillar’ of a project to address the tax challenges arising from the globalisation of the economy specifically as it relates to the impact on the way of working, referred to as the Pillar Two Rules. This guidance elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) rules agreed upon and released in December 2021 which lay out a co-ordinated system to ensure that multinational enterprises with revenues above €750 million pay tax of at least 15% on the income arising in each of the jurisdictions in which they operate.
The International Accounting Standards Board decided to respond to stakeholders’ concerns about the accounting implications arising from the adoption of these rules by jurisdictions.
The application of the Pillar Two recommendations may result in an impact on current and deferred tax or potentially may not represent an income tax as defined in IAS 12 Income Taxes. This is because adoption by specific jurisdictions may have its own set of tax legislation which may require to be assessed and may result in a significant number of unknown variables within the calculation of the global income to be taxed as well as the jurisdiction that is allowed to collect that tax.
Due to this significant uncertainty, the board has decided to propose an exemption to IAS 12, as it relates to deferred tax specifically until the uncertainties in the global tax system have been resolved and the board can thoroughly assess the situation and provide a reliable solution.
The amendments to IAS 12 have been detailed in an exposure draft: IASB/ED/2023/1 International Tax Reform − Pillar Two Model Rules (proposed amendments to IAS 12). The summary of these amendments are:
The board proposed to provide an exception to the requirements in IAS 12 that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD Pillar Two income taxes. An entity would disclose that it has applied the exception.
The board proposed that, in periods in which Pillar Two legislation is enacted or substantively enacted, but not yet in effect, an entity would disclose:
- Information about such legislation enacted or substantively enacted where the entity operates
- The jurisdictions in which the entity’s average effective tax rate is below 15%, and
- Whether there are jurisdictions where the entity expects either to pay Pillar Two income taxes although the 15% threshold does not apply or not to pay Pillar Two income taxes although the 15% threshold does apply
The IASB proposes that an entity applies the exception immediately upon issuance of the amendments and retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and the disclosure requirements for annual reporting periods beginning on or after 1 January 2023.
The exposure draft and related comment letters on International Tax Reform − Pillar 2 Model Rules can be downloaded here. Exposure draft feedback was expected in April 2023.
AUTHOR
Yingisani Maluleke, Manager, Audit Quality & Risk IFRS, from KPMG
