Pillar Two top-up taxes in financial reports

Many countries have amended their local laws to introduce a global minimum top-up tax¹ as part of the international tax reform (see KPMG BEPS 2.0 Tracker for an overview of legislative developments in countries around the world). This reform includes a two-pillar solution.

Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries. Pillar Two aims to ensure that large multinational groups pay at least the minimum rate of 15 percent on income arising in each jurisdiction in which they operate.

Read the transcript (PDF 115 KB)

The new Pillar Two tax laws are very complex and it may be challenging to estimate their impact. Engage with your tax specialists and users to ensure that your financial statements reflect appropriate amounts and provide meaningful and relevant information about your exposure to the top-up tax.

Irina Ipatova

Associate Partner, International Standards Group (ISG) KPMG IFRG

There are four mechanisms under Pillar Two that countries can adopt. Three mechanisms are active – the income inclusion rule (IIR), the undertaxed payment rule (UTPR) and a qualifying domestic minimum top-up tax (QDMTT) – and one is under development. In our view, all Pillar Two top-up taxes levied by tax authorities under the active mechanisms are generally income taxes accounted for under IAS 12 Income Taxes. This applies to all financial statements, including the consolidated financial statements of the ultimate or intermediate parent companies and the separate financial statements of group companies.

However, a mandatory exception applies under IAS 12 such that a company neither recognises nor discloses information about deferred tax assets and liabilities for Pillar Two taxes. Also, in our view, a company generally should not consider the impact of Pillar Two taxes when determining future taxable profits to assess recoverability of deferred tax assets arising under the domestic corporate income tax regime.