International Tax Reform—Pillar Two Model Rules (Proposed amendments to IAS 12)

Timeline

The IASB published the Exposure Draft International Tax Reform—Pillar Two Model Rules in January 2023. The Exposure Draft is open for comment until 10 March 2023.

The IASB aims to finalise any amendments, which would be effective immediately, in Q2 2023.

Our response to the IASB’s Exposure Draft was submitted on 9 March 2023.

Scope

In response to feedback from stakeholders, the IASB has published an Exposure Draft. It proposes that:

Entities must apply a temporary exception from accounting for deferred tax arising from the Pillar Two model rules and should disclose that they are applying the exception.

The IASB has also proposed that in the period when legislation has been enacted but is not yet effective, entities should make a series of disclosures on taxes arising from the Pillar Two model rules, including:

• information about legislation enacted or substantively enacted in jurisdictions where they have operations;
• the jurisdictions in which their average effective tax rate for the current period is below 15%, the aggregate accounting profit and tax expense or income for those jurisdictions, and the resulting weighted average tax rate;
• whether assessments the group has made in preparing for Pillar Two indicate that there are jurisdictions not included in the list above where the group considers it may be exposed to paying Pillar Two top-up tax, and that there are jurisdictions included above where the group considers it will not be exposed to paying Pillar Two top-up tax.

Once the Pillar Two model rules are effective, entities must present their Pillar Two current tax expense or income separately from other current tax expense or income.

Background

In December 2021, the Organisation for Economic Co-operation and Development (OECD) finalised the model rules for Pillar Two, one of the two Pillars designed to address the tax challenges presented by the globalisation and digitalisation of the economy.

The Pillar Two model rules introduce a minimum tax rate for entities and groups with turnover of €750m or above. In jurisdictions where an entity or group’s effective tax rate is below 15%, the model rules require the entity to top up the tax it pays to that rate.

Stakeholders have expressed concern around the complexities of accounting for income taxes in respect of the model rules, and especially around accounting for deferred taxes. They have also highlighted that the Pillar Two model rules may be enacted or substantively enacted very soon in some jurisdictions. As such, the need for the Amendments is urgent.

In response to these comments, the IASB issued an Exposure Draft on 9 January 2023, which proposes a set of disclosures alongside a temporary exception from accounting for taxes arising from the Pillar Two model rules under IAS 12 Income Taxes.

Final Comment Letter

[Our final comment letter is attached below.]

We welcome the ED. We support its objectives, the accelerated timetable and the introduction of a mandatory temporary exception from accounting for deferred tax arising from the Pillar Two model rules. In addition, we set out some potential enhancements to the proposals which we have identified from our analysis and outreach with stakeholders, including suggesting a more general disclosure requirement to replace the detailed disclosures proposed in the ED.