The GloBE rules will introduce a 15% global minimum corporate tax rate for MNEs with revenue above EUR750 million.
Implementing Pillar Two model rules require legislating new tax laws in each jurisdiction in the coming years. Companies that meet the definition of MNEs under the rules need to monitor the substantive enactment of such laws in each jurisdiction, which may introduce additional local requirements. How and when each jurisdiction substantively enacts such laws will affect the timing of recognition, measurement of the top-up tax and, in particular, the identification of the entities in the MNE group that are legally subject to the additional tax liability.
Proposed amendments to tax accounting requirements
Stakeholders have raised concerns about the potential implications for income tax accounting resulting from implementing the rules in a short period, especially the uncertainty over the accounting for deferred taxes. They urgently want clarity before tax laws are enacted to implement the rules in some jurisdictions.
In January 2023, the IASB published an exposure draft introducing a temporary exception to accounting for deferred taxes arising from the implementation of the Pillar Two model rules.
In January 2023, the International Accounting Standards Board (the Board) published an exposure draft to amend IAS 12 Income Taxes to introduce a temporary exception to the accounting for deferred taxes arising from the implementation of the rules and targeted disclosure requirements. The comment period ended on 10 March 2023, and there was overwhelming support from stakeholders for the temporary exception. Based on the current timeline, the amendment is expected to be finalized in the next few months.
To the extent the Board’s proposal is finalized such that deferred taxes are not recognized for the effect of the rules, companies will still need to account for the effect on current taxes and provide appropriate disclosures in their IFRS financial statements.
Given the complexity of the Pillar Two model rules, which involve legislative procedures in many jurisdictions, it will be important for companies to undertake detailed assessments of the relevant tax laws and establish and maintain effective internal controls over financial reporting arising from them.