Swiss MNE groups should carefully monitor the timing of (substantive) enactment of BEPS Pillar Two related legislation in Switzerland and abroad to determine the appropriate financial disclosures related to Pillar Two taxes following the issued amendments to IAS 12 Income Taxes earlier this year.
On 18 June 2023, the Swiss people voted in favor of implementing the global minimum tax framework (BEPS Pillar Two) agreed by the OECD/G20 Inclusive Framework.
In this blog series our experts are highlighting practical application issues Swiss MNE groups should think about in order to manage future minimum top-up tax consequences under Pillar Two.
In this blog we address how the (substantive) enactment of the Pillar Two legislation is relevant for for Swiss MNE groups based on the recently issued final amendments to IAS 12 Income.
What do the rules say?
On 23 May 2023, the International Accounting Standards Board (“IASB”) issued amendments to IAS 12 Income Taxes concerning the International Tax Reform – Pillar Two Model Rules. The amendments introduce:
- a temporary mandatory exception from accounting for deferred tax related to top-up tax; and
- new disclosure requirements.
The IAS 12 amendments provide IFRS preparers with a temporary mandatory exception to recognize deferred taxes related to Pillar Two taxes when the GloBE rules have been (substantively) enacted in a jurisdiction in which a group operates. Since the exception applies immediately and retrospectively until the IASB decides either to remove it or to make it permanent, the companies need to disclose that they have applied the mandatory temporary exception.
In addition to the application of the exception of accounting for deferred taxes, IAS 12 includes additional disclosure requirements for periods where the Pillar Two legislation is (substantively) enacted but before top-up tax is effective.
In particular, 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.
How is this relevant for Swiss MNE Groups
When looking at the IAS 12 amendment in more detail, you will realize that both the application of the mandatory exception to account for deferred taxes resulting from top-up tax as well as the new disclosure requirements are linked to an enacted or substantively enacted Pillar Two legislation in any jurisdiction. Therefore, and as generally with deferred taxes, the date of substantive enactment is particularly relevant for affected groups.
Currently, it is the general view that irrespective of the successful public vote to amend the Swiss constitution, the BEPS Pillar Two legislation is not deemed to be substantively enacted yet in Switzerland. On 14 September 2023, the deadline of the second consultation of the amended draft ordinance has elapsed, so close monitoring of the next steps taken by the Swiss government is therefore crucial – in particular as we are approaching the closing of the third quarter for many Swiss MNEs very soon.
Key questions and next steps
In our view, Swiss MNE groups should:
- closely monitor the legislative progress in Switzerland and in each jurisdiction in which it operates to determine whether (substantive) enactment is reached. This may require judgment based on the published legislation;
- based on the actual status of the legislation – in Switzerland and abroad – determine the required level of disclosures for interim and year-end financial statements;
- assume that Switzerland will have a substantively enacted Pillar Two legislation as per 31 December 2023 at the latest and proactively collect the relevant information that is known or can be reasonably estimated to help users of its financial statements understand the exposure to Pillar Two income taxes at year-end reporting.
It is strongly recommended to seek advice on Pillar Two and the related tax accounting issues to find appropriate solutions.