OECD Pillar Two rules - Amendments to IAS 12 Incomes Taxes (IFRS) and to FRS 102 and FRS 101

Introduction

The International Accounting Standards Board (IASB) has published amendments to IAS 12 Income Taxes (IAS 12) that introduce a temporary exception to the recognition of deferred taxes resulting from the implementation of the OECD Pillar Two rules, and that require targeted disclosures on entities’ exposure to these new tax rules.

Additionally, the Financial Reporting Council (FRC) has published amendments to FRS 102 International tax reform – Pillar Two model rules, which are broadly similar to those introduced by the IASB into IAS 12. The FRC has also published amendments to FRS 101 International tax reform – Pillar Two model rules to allow FRS 101 reporters to have some disclosure exemptions from targeted disclosure requirements.

Tax reform

The Organisation for Economic Co-operation and Development (OECD) rules set out a mechanism for the Global Anti-Base Erosion (GloBE) rules under Pillar Two that introduce a global minimum corporate tax rate set at 15%. These rules aim to ensure that large Multi-National Entity (MNE) groups pay a minimum level of tax on income arising in each of the jurisdictions in which they operate. The rules require a “top-up tax” to be applied whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate. These rules apply to MNEs with revenue above €750 million.

For UK purposes, the UK government has published legislation that sets out an income inclusion rule (multinational top-up tax) and a qualified domestic minimum top-up tax, which are broadly aligned with the OECD’s global minimum tax rules under Pillar Two. In the UK, the tax reform will apply for accounting periods beginning on or after 31 December 2023 (effectively therefore for the majority of entities from 1 January 2024). The qualified domestic minimum top-up tax will apply not only to MNE groups but also to UK domestic groups and UK standalone entities that meet the size threshold of having annual revenues of more than €750 million.

The legislation was substantively enacted on 20 June 2023, as part of the Spring Finance Bill 2023, following the completion of the report stage and third reading at the House of Commons.

Accounting and corporate reporting implications under IFRS (IAS 12)

In April 2023, the IASB finalised discussions regarding the amendments to IAS 12 following feedback from the exposure draft and published the amendments in May 2023. In light of the comments received, the IASB decided that it would not specify the exact disclosures (or the basis on which the disclosures should be prepared) that an entity would be required to provide on its exposure to OECD Pillar Two income taxes during the period between the enactment (or substantive enactment) of the tax legislation and its implementation.

The final amendments to IAS 12 therefore:

• Introduce a temporary exception (with no specified end date) to the recognition of deferred taxes resulting from the implementation of the tax rules under IAS 12 and the disclosure of information about these deferred taxes;
• Require an entity to disclose that it has applied this exception;
• Between the enactment or substantive enactment (substantive enactment being achieved on 20 June 2023) of the tax legislation and its implementation, require the disclosure of known or reasonably estimable information (similar to the requirements of IAS 8.30 relating to the implementation of new standards) that would help users of financial statements to understand the entity’s exposure to income taxes arising from the OECD Pillar Two rules:
  • these disclosures should be both quantitative and qualitative;
  • these disclosures would not need to reflect all the specific requirements of the legislation, and could be provided in the form of an indicative range;
  • if information is not known or reasonably estimable, the entity would be required to provide a statement to this effect and state the progress it has made towards assessing its exposure to income taxes arising from the OECD Pillar Two rules;
• Require separate disclosure of current tax expense arising from the OECD Pillar Two rules.

Effective date

The temporary exception to the recognition of deferred taxes is applicable retrospectively and immediately on publication of the amendments, being May 2023. The disclosure requirements are applicable for accounting periods beginning on or after 1 January 2023, but not for interim periods ending on or before 31 December 2023 (which is to provide an entity with enough time to prepare the required information). For UK entities, it is important to remember that the amendments may only be applied once they are adopted for use by the UK Endorsement Board.

Substantively enacted – Implications for 30 June 2023 reporting

For accounting purposes, the tax legislation became effective on 20 June 2023 when substantive enactment was achieved. Whereas, the IAS 12 amendments were adopted for use within the UK on 19 July 2023 by the UK Endorsement Board (UKEB).

For annual or interim periods ended on 30 June 2023, this creates a timing delay between the date the tax legislation becomes effective and the date when the IAS 12 amendments can be applied.

Accounting and corporate reporting implications under FRS 102 and FRS 101

The amendments under FRS 102 are similar to those introduced under IFRS. They introduce changes to Section 29 Income Taxes to provide a temporary exception (with no specified end date) to the recognition of deferred taxes resulting from the implementation of the Pillar Two legislation and to consider the effects of the legislation when measuring recognised deferred tax assets and liabilities, as well as requiring the disclosure of specified information, including:

• If an entity is or expects, based on known or reasonably estimable information, to be within the scope of the Pillar Two legislation, it shall disclose that fact;
• To disclose separately the current tax expense related to Pillar Two income taxes; and
• When such legislation has been enacted or substantively enacted (substantive enactment being achieved on 20 June 2023) by the reporting date but is not yet in effect for the entity, an entity shall disclose known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income tax arising from that legislation.
  • This shall include disclosure of qualitative and quantitative information about its exposure to Pillar Two income tax at the end of the reporting period. This information does not have to reflect all the specific requirements of the Pillar Two legislation and can be provided in the form of an indicative range. To the extent information is not known or reasonably estimable, an entity shall instead disclose a statement to that effect and disclose information about the entity’s progress in assessing its exposure.

For FRS 101 reporters, the amendments also allow some disclosure exemptions from the targeted Pillar Two disclosures requirements, where equivalent disclosures are made in the consolidated financial statements in which the entity is included. These exemptions being to the paragraphs 88C and 88D of IAS 12 which relate to the disclosure of an entity’s exposure to the Pillar Two taxes and associated qualitative and quantitative disclosures.

Effective date

The temporary exception to the accounting of deferred taxes is applicable retrospectively and immediately on publication of the amendments, being May 2023. The disclosure requirements are applicable for accounting periods beginning on or after 1 January 2023.