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23 May 2023 (updated 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:

  • provide a temporary mandatory relief 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 relief.

These amendments provide a welcome relief from deferred tax accounting and allow companies to focus on assessing the potential current tax impacts of the global minimum top-up tax.

Irina Ipatova
Associate Partner, International Standards Group (ISG)
KPMG International

Challenges in accounting for top-up tax

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.

  • Is top-up tax in the scope of IAS 12?
  • Do the GloBE model rules create additional temporary differences?
  • Do companies need to remeasure their existing temporary differences in relation to deferred tax recognised?
  • How will companies determine the rate for measuring the deferred tax impacts of top-up tax?

With some jurisdictions expected to implement the GloBE model rules as early as the first half of 2023, stakeholders have asked for urgent clarity.

Mandatory relief from deferred tax accounting

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. 


New disclosures

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.

  • 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.​

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.

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.

Actions for management to take now

  • Read our talkbook (PDF 592 KB) for further details of the amendments and our additional insights and our guide on Pillar Two taxes in 2023 reports.
  • Continue to engage with tax specialists, assess the impacts and monitor the implementation of GloBE model rules into relevant jurisdictions’ tax laws.
  • Engage with investors to determine the appropriate level of disclosures to provide now and in the future.
  • Collect appropriate information to provide the new disclosures about your potential exposure to Pillar Two taxes.

1 GloBE – global anti-base erosion.

2 This includes any qualified domestic minimum top-up tax. 

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