Following concerns expressed by stakeholders, in order to provide timely relief for affected entities and to avoid inconsistencies in interpretations on how to deal with IAS 12 and Pillar Two model rules, the IASB proposes to introduce:
- A temporary exception to the accounting of deferred taxes arising from Pillar Two implementation; and
- Targeted disclosure requirements.
More in particular, questions are raised regarding the following 3 proposals:
- Temporary exception: As a temporary (but undefined in time) exception to (existing) IAS 12 requirements for income taxes arising from tax law enacted or substantially enacted, an entity must (mandatory) neither recognize nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes[1] (and disclose the application of this exception).
- Disclosure: The only disclosures an entity for the current period must make in the periods in which Pillar Two legislation is enacted or substantively enacted, but not yet in effect, are:
- Information about such legislation enacted or substantively enacted in jurisdictions in which the entity operates.
- The jurisdictions in which the entity’s average effective tax rate (calculated as IAS 12[1]) for the current period is below 15%, as well as, for these jurisdictions in aggregate, the accounting profit[2] and tax expense[3], and the weighted average tax rate.
- A statement on whether assessments made by the entity in preparing to comply with Pillar Two legislation indicate that there are:
- Jurisdictions identified under application of aforementioned requirement (b), but where the entity might not be exposed to paying Pillar Two income taxes, or
- Jurisdictions not identified under application of aforementioned requirement (b), but where the entity might be exposed to paying Pillar Two income taxes.
In periods where the Pillar Two legislation is in effect, an entity must disclose separately its current tax expense (income) related to Pillar Two income taxes.
- Effective date and transition: The aforementioned exception and disclosure requirement for the application of the exception (see 1 above) is proposed to be effective immediately and retrospectively in accordance with IAS 8[4]; The aforementioned disclosure requirements (see 2 above) are proposed to be effective for annual reporting periods beginning on or after 1 January 2023.
Findings and key takeaways
- It is very much welcomed that the IASB has shown sensitivity to the stakeholders' concerns, and sensibly provides for an open-ended, temporary exemption to account for Pillar Two income taxes.
- However, from our first reading and in our view, the rather mechanical disclosure requirement (b) proposed should be further investigated. Namely, from our experience with early Pillar Two assessments on the basis of IFRS/IAS 12 data we may observe that the adjustments to be made under Pillar Two legislation as it stands today may result in a significant difference between a ‘Pillar Two Effective Tax Rate’ and a ‘IAS 12 Effective Tax Rate’. Also, entities with an accounting ETR of below 15% may be eligible for (temporary) safe harbours. Although we can relate to the fact that the information provided through disclosure requirement (b) might be indicative for being exposed to Pillar Two income taxes, and even in many cases, it should be further verified that the aforementioned expected discrepancy may not trigger market distortions – even in few cases - through disclosing such high-level and mechanical information that would not be consistent with eventual Pillar Two outcomes. We understand that the disclosure requirement (c) somewhat serves as a means to accommodate the management of such risk, but today we are uncertain whether there is no better alternative – e.g. by retaining an open standard for disclosures on Pillar Two impact (akin to Uncertain Tax Positions), and apply the self-assessment contained in disclosure requirement (c) as the leading principle instead. We will further investigate this (potential) issue in more detail, and provide the IASB with our on-topic comments.
- MNE groups reporting under IFRS, finally, are advised to organize a joint (tax and finance teams combined) reading of this Exposure Draft, and provide the IASB with their specific comments as well by 10 March 2023.
The views expressed in this article are that of the author, Andy Neuteleers – partner Tiberghien economics.
For further inquiries on this topic, and more general inquiries on Pillar Two you can contact the author via andy.neuteleers@tiberghien.com, respectively the dedicated Tiberghien Pillar Two team:
Bart De Cock – Partner (Belgium) – bart.decock@tiberghien.com
Robin Minjauw – Partner (Belgium) – robin.minjauw@tiberghien.com
Koen Morbée – Partner (Belgium) – koen.morbee@tiberghien.com
Andy Neuteleers – Partner Tiberghien economics (Belgium) – andy.neuteleers@tiberghien.com
Ahmed El Jilali – Counsel (Belgium) – ahmed.eljilali@tiberghien.com
Gauthier Mary - Senior Associate (Luxembourg) - gauthier.mary@tiberghien.com
Rik Smet – Senior Associate (Belgium) – rik.smet@tiberghien.com
Heleen Van Baelen – Senior Manager Tiberghien economics (Belgium) - heleen.vanbaelen@tiberghien.com
[1] Top-Up Tax is considered to be a Pillar Two income tax
[2] IAS 12, paragraph 86.
[3] Profit or loss for a period before deducting tax expense, in accordance with IAS 12, paragraph 5.
[4] Or income.
[5] IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
