Background

In March 2022, the OECD released technical guidance on its 15% global minimum tax agreed as the second ‘pillar’ of a project to address the tax challenges arising from digitalisation of the economy. This guidance elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) Rules agreed and released in December 2021 which lay out a co-ordinated system to ensure that multinational enterprises with revenues above €750 million pay tax of at least 15% on the income arising in each of the jurisdictions in which they operate.

The IASB decided to respond to stakeholders’ concerns about the potential implications of the imminent implementation of these rules on the accounting for income taxes by jurisdictions. In particular, the IASB noted that the situation is very complicated as:

• jurisdictions may change statutory tax rates to avoid being considered a low-tax environment;
• companies might decide to move their business to jurisdictions with higher statutory tax rates; and
• companies might engage in business that comes with tax incentives that might bring down their statutory tax rate to below 15% although the jurisdiction they are doing business in is not generally considered a low-tax environment.

All of these and further considerations would entail most complicated calculations of deferred tax in a situation that is highly volatile due to the fact that jurisdictions implement the OECD rules at different speed and different points of time. Due to the many unknown variables involved, the IASB has decided to propose an exemption until the global tax system has settled and reestablished itself and the IASB can thoroughly assess the situation and provide a reliable solution.

Suggested changes

The proposed amendments in exposure draft IASB/ED/2023/1 International Tax Reform — Pillar Two Model Rules (Proposed amendments to IAS 12) are:

• The IASB proposes to provide an exception to the requirements in IAS 12 that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes. An entity would disclose that it has applied the exception.
• The IASB proposes that, in periods in which pillar two legislation is enacted or substantively enacted, but not yet in effect, an entity would disclose:
  • information about such legislation enacted or substantively enacted where the entity operates;
  • the jurisdictions in which the entity’s average effective tax rate is below 15%; and
  • whether there are jurisdictions where the entity expects either to pay pillar two income taxes although the 15% threshold does not apply or not to pay pillar two income taxes although the 15% threshold does apply.
• The IASB proposes that an entity applies the exception immediately upon issuance of the amendments and retrospectively in accordance with IAS 8 and the disclosure requirements for annual reporting periods beginning on or after 1 January 2023.

Comments on the proposed changes are requested by 10 March 2023 (the DPOC agreed to a shortened comment period in view of the urgency of the matter).

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Our related Need to know publication
• Our UK Accounting Plus project page on IAS 12 — OECD pillar two model rules