Recharges

No.

The Accounting Standards themselves cannot require companies to enter into a recharge arrangement – i.e. a parent is generally not required to recharge the subsidiary for Pillar Two taxes incurred. However, companies need to carefully consider the laws and regulations, and any other requirements – e.g. a shareholder agreement – when determining whether a recharge arrangement is needed.

Yes – subject to the relevant legal and regulatory environment.

The accounting treatment reflects the terms and conditions of any cash recharge arrangement that is entered into.

It depends on the accounting policy selected.

IFRS Accounting Standards do not specifically address the accounting for Pillar Two tax recharge arrangements involving group companies in their separate financial statements. In our view, a company should choose an accounting policy and apply it consistently, using one of the following approaches.

• Approach 1 – Pillar Two taxes are recognised as income taxes of the company legally liable for them, as follows.
  • The cash recharge arrangement is accounted for as other income (expenses) in the income statement.
  • A corresponding intra-group receivable (payable) is recognised on the balance sheet.
  • The Pillar Two taxes continue to be recognised as income taxes in the income statement of the group company that is legally liable for them.
• Approach 2 – Pillar Two taxes are recognised as income taxes of the company triggering them, as follows.
  • The cash recharge arrangement is accounted for as a reduction (increase) in income tax expense in the income statement.
  • A corresponding intra-group receivable (payable) is recognised on the balance sheet.
  • The Pillar Two taxes are recognised as income taxes in the income statement of the group company that triggers them.

See an illustrative example.

We believe that only the company that is legally liable for the Pillar Two taxes recognises an income tax liability under IAS 12 Income Taxes – i.e. the company with a statutory obligation to pay the top-up tax to the relevant tax authority.

Under the two approaches for accounting for cash recharge arrangements (see Question 3), the companies recognise an intra-group receivable (payable) – i.e. a financial asset (liability) recognised under IFRS 9 Financial Instruments representing their contractual right (obligation). The company that is legally liable for the Pillar Two tax continues to recognise a current income tax liability under IAS 12.

No.

We believe that, under either approach for accounting for cash recharge arrangements (see Question 3), Pillar Two taxes can be recognised as an income tax expense only in one of the company’s separate financial statements – i.e. it would be inappropriate for both group companies involved in the cash recharge arrangement to recognise Pillar Two taxes as income taxes in their separate financial statements.