Different countries are at different stages of implementing Pillar Two tax legislation. To determine how to reflect the current top-up tax and what information to disclose, companies need to consider the status of implementation of Pillar Two tax legislation in the countries where the group operates at the interim reporting date.
It depends – different countries are at different stages of implementing Pillar Two tax legislation.
In some countries, some mechanisms are already effective; in others, some mechanisms are enacted but will become effective in 2025 or later, or they are still under development.
Companies need to consider the status of implementation in the countries where the group operates – e.g. are all three of the Pillar Two mechanisms already effective in all of the jurisdictions where the group operates? If not, then the liability for the Pillar Two taxes may move up and down the group during the transition period (see Question 2 for more detail).
Companies also need to consider if safe harbours apply that may provide some transitional reliefs from recognising Pillar Two taxes. For more information on safe harbour rules, see our related guidance.
Yes – if some Pillar Two mechanisms are not yet effective in all of the countries where the group operates, then the liability for the tax may move up and down the group.
This means that one company in the group may be legally liable for the Pillar Two taxes at the interim reporting date – based on the effective tax laws at that date – but not required to pay it until a later date. However, a different group company may ultimately be liable for that tax amount at the year end.
In our view, it should be the company that is legally liable for the Pillar Two taxes at the interim reporting date.
The legally liable company should take Pillar Two taxes into account when performing its interim income tax calculations and estimating the weighted-average annual effective tax rate for the full year. This is irrespective of whether it expects another group company to ultimately be liable for that amount of tax at the year-end reporting date. The estimated weighted-average annual effective tax rate reflects enacted, or substantively enacted, tax laws at the interim reporting date, and so cannot reflect expectations of future changes in tax laws.
See an illustrative example.
Yes – assuming the company was not required to pay the Pillar Two taxes during the year.
This may occur, for example, when Pillar Two tax legislation in the ultimate parent’s jurisdiction is enacted after the interim reporting date but has retrospective effect. Because the intermediate parent company has no legal obligation to pay the tax at the year end, the income tax amount recognised in its interim financial statements is reversed in the annual financial statements.
Conversely, if Pillar Two tax legislation in the ultimate parent’s jurisdiction is enacted after the interim reporting date and applies prospectively, then the intermediate parent company may still be legally liable for the top-up tax for part of the year and will continue to recognise it in the annual financial statements.
Maybe – depending on the ownership interests within the group.
In our illustrative example, the following applies.
- UP holds a 90 percent interest in P.
- P holds a 100 percent interest in S, which is located in a low-tax jurisdiction.
- At 30 June 2024, P recognises the Pillar Two taxes because it is legally liable.
- At 31 December 2024, UP is now legally liable and recognises the Pillar Two taxes.
- The ultimate amount of the top-up tax recognised and payable by UP decreases. This is because UP holds only 90 percent of P.
IAS 34 Interim Financial Reporting does not set out specific disclosure requirements for Pillar Two taxes in the condensed interim financial statements. However, companies need to disclose information that is relevant for an understanding of the interim period, and to compensate for the potential loss of the information resulting from the mandatory deferred tax exception. This may include:
- a statement that the group applied the mandatory deferred tax accounting relief;
- the current income tax expense related to Pillar Two taxes; and
- the group’s exposure to future Pillar Two taxes, including expected changes resulting from group companies transitioning at different times, and changes in tax strategies.
For an illustration of these disclosures, see Note 11(B) in our Illustrative disclosures – Guide to condensed interim financial statements.
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