BEPS Pillar Two Minimum Tax – IFRS IAS 12 final amendments published
BEPS Pillar Two Minimum Tax – IFRS - IASB publish final IAS 12 amendments – Deferred tax exception and disclosure requirements
IFRS IAS 12 final amendments published
On 23 May 2023, the International Accounting Standards Board (IASB) published final amendments to IAS 12 Income Taxes. These IAS 12 amendments provide companies with a temporary mandatory relief from deferred tax accounting for the impact of the top-up tax and require them to provide new disclosures. This article provides a summary of the changes and suggested next steps for affected businesses.
Qualifying Domestic Minimum Top Up Taxes (QDMTTs) are included in the IASB definition of Pillar Two income tax.
These amendments can be illustrated with an example 31 December year end group where Pillar Two minimum tax is substantively enacted during the year ended 31 December 2023 and applies from 1 January 2024.
Interim (and year ends) 30 June 2023
As per our previous article, for UK groups, these IAS 12 amendments are unlikely to have been endorsed by UK or EU Endorsement boards by 30 June 2023. If substantive enactment has occurred before 30 June 2023 but endorsement has not occurred, UK groups would be expected to be able to utilise the deferred tax exception through an accounting policy based on the US GAAP analysis.
Year ending 31 December 2023
- Mandatory exception from accounting for deferred tax on top-up applies and disclosure of this should be made; and
- New disclosure objective requirements also apply, which primarily comprise of:
- Information that is known or can be reasonably estimated to understand the company’s exposure to Pillar Two income taxes at the reporting date;
- Information that does not need to reflect all of the specific requirements in the legislation and can be provided as an indicative range:
- Qualitative information: How the company is affected by Pillar 2 income 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 (ETR) applicable to those profits, or how the average ETR would have changed if Pillar Two legislation had been effective; and
- 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.
Year ending 31 December 2024
- Mandatory deferred tax exception continues to apply and disclosure of this should continue to be made; and
- As top up tax now applies to the group, disclosure of the current tax expense related to top-up tax.
Other accounting standards (FRS102 and US GAAP)
There is a similar deferred tax exception for FRS102, which has been subject to consultation. For US GAAP, Pillar Two is considered an Alternative Minimum Tax (AMT) so companies will not record or remeasure deferred tax for Pillar Two. There are no specified disclosures under US GAAP.
These IAS 12 amendments require disclosure in annual accounting periods, when Pillar Two is substantively enacted but before it applies. Auditors and other stakeholders will expect groups to pro-actively plan for these disclosure requirements. Groups should continue:
- Preparing impact assessments for completion during the year before Pillar Two applies to the group (e.g. during year ended 31 Dec 2023 for calendar year end groups) to support external financial statement disclosures and their assessment as to estimated future Pillar Two tax exposures; and
- Identifying and addressing data gaps to capture the required information in real-time when Pillar Two applies to the group (e.g. from 1 January 2024).