Impairment assessment

Yes – if sufficient information about the upcoming changes to tax laws is available and management expects that the law will be finalised as drafted.

When determining value in use, in our view a company should consider the impact of upcoming changes to tax laws. Depending on the stage of the legislative process, it may be challenging for management to determine the impact of the changes before they are finalised. This means that they may be unable to reflect this in future post-tax cash flow estimates if information about specific provisions of the tax laws or their timing is insufficient or unavailable.

We believe that a company should reflect changes in the cash flows when calculating value in use if:

• sufficient information is available on the upcoming changes to tax laws that may significantly impact value in use; and
• it expects that the law will be finalised as drafted.

In our view, the cash-generating unit (CGU) that triggers it.

This applies to impairment tests in the consolidated financial statements of a group in which a company that is liable for the top-up tax and a company that triggers it are included in different CGUs.

Yes – if sufficient information about the upcoming changes is available that would allow a market participant to reflect these changes in the cash flows.

When determining fair value less costs of disposal, in our view a company should consider the impact of upcoming changes to tax laws based on a market participant’s perspective – i.e. whether such changes would apply or be relevant to a market participant.

When performing this analysis, similar challenges to those discussed in Question 1 may arise if information about upcoming changes to tax laws is insufficient or unavailable. If information is available and a market participant could reflect these changes in the cash flows, then we believe that these upcoming changes should be reflected in the tax cash flows when calculating fair value less costs of disposal.

In our view, the CGU that triggers it – but only if a market participant would be subject to the top-up tax on acquiring the company that triggers it.

When determining fair value less costs of disposal in an impairment test at the group level, in our view a company should consider the market participant’s perspective on whether and where to reflect expected future top-up tax payments. This means considering:

• whether Pillar Two tax laws apply to the market participant – i.e. whether it would be subject to the top-up tax if it acquired the company that triggers it; and
• how a market participant would take into account the expected future top-up tax payments in pricing the CGU that either triggers the top-up tax or is liable to pay it.

If a market participant would be subject to the top-up tax on acquiring the company that triggers it, then we believe that the expected future top-up tax payments should be reflected in the CGU that triggers the top-up tax.

Yes, if a market participant would be subject to the top-up tax and would locate the debt to finance the CGU in a jurisdiction that triggers the top-up tax.

Companies commonly use the weighted-average cost of capital (WACC) formula to estimate a post-tax discount rate. The WACC incorporates the market’s view of how a company would structure its financing using both debt and equity.

However, the top-up tax may not always impact both the tax cash flows and the WACC. The WACC formula uses the tax rate of the jurisdiction in which the market participant would locate the debt used to finance the CGU’s operations. Therefore, the impact of the top-up tax on the WACC will depend on the jurisdiction of the debt.

• If the debt would be located in a jurisdiction that does not trigger the top-up tax – i.e. with an effective tax rate for the purposes of Pillar Two top-up taxes greater than or equal to 15 percent – then the tax rate in the WACC is not impacted.
• If the debt would be located in a jurisdiction that triggers the top-up tax – i.e. with an effective tax rate for the purposes of Pillar Two top-up taxes under 15 percent – then the tax rate in the WACC is impacted.

The corporate tax rate used in a WACC calculation represents the relevant tax rate for calculating the after-tax cost of debt. In our view, this rate should reflect upcoming changes in income tax laws when sufficient information is available about these changes to allow a market participant to reflect them. If upcoming changes in income tax laws impact both the tax cash flows and the WACC, then we believe that these upcoming changes to the tax rate should be reflected in the WACC and in the cash flows at the same time.