On 31 December 2022, the Korean government released their global minimum tax rules to align with the OECD BEPS 2.0 Pillar Two after it was passed by Korea’s National Assembly on 23 December 2022. The regulation will be included in the Adjustment of International Taxes Act (AITA) and will be effective for fiscal years beginning on or after 1 January 2024. The Enforcement Decrees, which provide more specific guidance on the laws, are expected to be enacted within 2023. With the new legislation, Korea is going to introduce the IIR as from January 1, 2024. It also expected to introduce the UTPR, although we are awaiting further clarification. The introduction of the UTPR as per 1 January 2024 would be particularly surprising as, so far, the EU and other countries that have announced legislation have indicated they will introduce the UTPR one year later, i.e. as at 1 January 2025. If only Korea introduces the UTPR as per 1 January 2024, it would attract UTPR top-up tax globally of all multinationals with a presence in Korea. We will monitor reactions of other countries.
KPMG and other professional services firms are discussing amongst themselves whether the December passage of legislation should be considered (substantive) enactment. In the event it can be concluded that the Pillar 2 legislation of Korea is not (substantively) enacted as per 31 December 2022, then the impact on the 2022 financial statements may be limited to qualitative disclosures.
If Korea indeed enacted Pillar 2 on 31 December 2022 – IFRS impact
In the event it is concluded that the Korean tax law change is (substantively) enacted as per 31 December 2022, then this will have an impact on the 2022 IFRS financial statements especially when the MNE:
- Falls in the scope of Pillar 2
- Has low tax jurisdictions (<15% GloBE ETR) and
- Has a constituent entity in Korea.
As there are no other countries yet that have enacted their Pillar 2 legislation, Korea would in principle be eligible to collect top up taxes from 1 January 2024. Assuming the legislation was enacted by Korea on 31 December 2022, additional tax disclosures should be considered in the December 2022 annual accounts.
The proposed amendments to IAS 12 provide some guidance on this situation. However, the proposal would apply for annual reporting periods beginning on or after 1 January 2023. For that reason, companies will have to evaluate which qualitative and quantitative disclosures would be required for the annual reporting periods ending 31 December 2022. Below we will further outline what the proposed amendments entail.
We will closely monitor the status of the Korean tax law change and keep you informed of any updates.
Proposed amendments to IAS 12 published
As jurisdictions prepare to amend their local tax laws to introduce the global minimum top-up tax (‘GloBE model rules’), stakeholders are questioning how they will account for those changes under IFRS® Accounting Standards. In particular, they are questioning whether top-up tax falls within the scope of IAS 12 Income Taxes and, if so, how to account for its deferred tax impacts.
In response to these concerns, the International Accounting Standards Board (IASB) announced in December that it would release an Exposure Draft for consultation, which has now been published outlining the proposed amendments to IAS 12 Income Taxes. In short, the IASB proposes to amend IAS 12 to:
- provide a temporary mandatory exception from deferred tax accounting for top-up tax; and
- require companies to provide new disclosures to compensate for the potential loss of information resulting from the temporary exception.
In terms of proposed actions to take now, we recommend the following:
- Continue to engage with tax specialists, assess the potential impact and monitor the progress of implementation of GloBE model rules into relevant jurisdictions’ tax laws.
- Engage with investors to determine the appropriate level of disclosures you are required to provide now before the proposed relief applies, and the disclosures required once the proposed relief applies.
- Ensure that you collect sufficiently detailed information to provide the proposed disclosures about your operations in low-tax jurisdictions.
We would be pleased to further discuss the potential impact of the GloBE model rules, and the impact of the IASB proposals on your business.