International Tax Reform — Pillar Two Model Rules

Date recorded:

Amendments to the IFRS for SMEs® Accounting Standard (Agenda Paper 12)

In January 2023, the IASB published the ED International Tax Reform—Pillar Two Model Rules, which proposed amendments to IAS 12 Income Taxes. The IASB expects to publish the final amendments in May 2023.

In considering whether and how to amend the IFRS for SMEs Accounting Standard for a new or amended IFRS Accounting Standard, the IASB applies its alignment approach. The alignment approach applies three principles: relevance to SMEs, simplicity and faithful representation.

Applying the alignment approach, at its meeting in April 2023, the IASB decided the Pillar Two model rules (and the proposed amendments to IAS 12) are relevant to entities applying the IFRS for SMEs Accounting Standard. At that meeting the IASB added to its work plan a narrow-scope standard-setting project to amend Section 29 Income Tax of the Accounting Standard outside the periodic review of the Accounting Standard (that is, outside the Second Comprehensive Review of the IFRS for SMEs Accounting Standard).

In this meeting, the IASB discussed its alignment principles of simplicity and faithful representation, and also an overall assessment of costs and benefits.

Staff recommendation

The staff made the following recommendations:

  • Recommendation 1 — To amend Section 29 Income Tax of the IFRS for SMEs Accounting Standard:
    • To introduce a temporary exception from accounting for deferred taxes related to Pillar Two income taxes
    • To make the temporary exception mandatory
    • To require an SME to disclose that it has applied the temporary exception
    • To require an SME to apply these amendments immediately upon their issuance and retrospectively in accordance with Section 10 of the Accounting Standard
  • Recommendation 2 — That the IASB does not specify how long the temporary exception will be in place
  • Recommendation 3 — That the IASB amends Section 29 to require an SME to disclose its current tax expense related to Pillar Two income tax and to apply this disclosure requirement for annual reporting periods beginning on or after 1 January 2023
  • Recommendation 4 — To clarify that the disclosure objective in paragraph 29.38 of the IFRS for SMEs Accounting Standard applies to information about the entity’s exposure to Pillar Two income taxes
  • Recommendation 5 — Not to introduce new disclosure requirements in periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect
  • Recommendation 6 — To make consequential amendments in Section 35 Transition to the IFRS for SMEs of the IFRS for SMEs Accounting Standard
  • Recommendation 7 — To ask the IFRS Foundation Due Process Oversight Committee (DPOC) to approve a 45-day comment period for the ED of proposed amendments to the IFRS for SMEs Accounting Standard

The staff asked the IASB whether:

  • It is satisfied that it has complied with the applicable due process steps and that the staff should begin the balloting process for the ED
  • Any IASB member intends to dissent from the proposals in the ED

IASB discussion

One IASB member suggested that a statement should be proposed that withdrawing the temporary exemption will take place as part of a comprehensive review of the IFRS for SMEs Standard rather than as a separate amendment. This is to signal preparers that there will be limited changes in the future. Another IASB member disagreed with that, saying it would take flexibility from the IASB to remove the temporary exemption.

There was some discussion about clarifying that the disclosure objective in Section 29 of the IFRS for SMEs Standard applies to information about the entity’s exposure to Pillar Two income taxes. IASB members agreed that this needs to be clarified but there was some discussion as to whether this should be done in the Standard or in the Basis for Conclusions (BC). The main argument for adding it to the Standard was that it is more visible to SMEs as smaller entities do not usually consult the BC. The main argument against adding to the Standard was that this is only applicable to larger SMEs and it could therefore cause confusion for smaller SMEs as to whether this disclosure requirement applies to them.

IASB decision

All IASB members voted in favour of Recommendation 1. When asked whether an explicit statement should be made that the temporary exception will only be removed in a period review, only 1 of the 14 IASB members voted in favour.

All IASB members voted in favour of Recommendations 2-3.

All IASB members voted in favour of Recommendation 4, with no IASB member objecting to add the clarification in the Standard and 7 IASB members objecting to add the clarification in the BC only. The Chair therefore concluded that the clarification will be made in the Standard.

All IASB members voted in favour of Recommendations 5-7.

All IASB members were satisfied that the IASB complied with the applicable due process requirements and no IASB member demonstrated intent to dissent from the ED.

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