Global minimum top-up tax
Relief from deferred tax accounting
(This article was published on 23 May 2023 and updated on 29 September 2023)
As jurisdictions prepare to amend their local tax laws to introduce the global minimum top-up tax in line with the GloBE1 model rules, stakeholders are questioning how to account for the changes under IFRS® Accounting Standards.
In particular, they question whether top-up tax is in the scope of IAS 12 Income Taxes and, if so, how to account for its deferred tax impacts.
To address these concerns, the International Accounting Standards Board (IASB) has amended IAS 12 to:
Top-up tax differs from income taxes that arise under ‘traditional’ tax regimes. Traditional income taxes are generally based on a company’s taxable profit; top-up tax will arise only if a group pays insufficient income tax at a jurisdictional level.
This has led to questions from stakeholders, such as the following.
With some jurisdictions expected to implement the GloBE model rules as early as the first half of 2023, stakeholders have asked for urgent clarity.
In response, the IASB has amended IAS 12 to introduce a temporary mandatory relief from accounting for deferred tax that arises from legislation implementing the GloBE model rules2. Under the relief, companies are effectively exempt from providing for and disclosing deferred tax related to top-up tax. However, they need to disclose that they have applied the relief.
The relief is effective immediately and applies 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.
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.
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.
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 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.
Global minimum top-up tax
Relief from deferred tax accounting
Update (29 September 2023): The IASB has also published amendments to Section 29 Income Tax of the IFRS for SMEs Accounting Standard. They are similar to those made to IAS 12 under the full IFRS Accounting Standards, although the approach to disclosures about exposure to the top-up tax differs.
1 GloBE – global anti-base erosion.
2 This includes any qualified domestic minimum top-up tax.
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