Pillar Two disclosures in 30 June 2024 financial statements
Pillar Two disclosures in 30 June 2024 financial statements
The Organization for Economic Cooperation and Development (OECD)’s Pillar Two ‘top-up’ income tax regime is upon us as more and more countries start implementing legislation to impose the global minimum tax and a domestic minimum tax, both at a tax rate of 15 per cent, for entities part of a group with consolidated revenue exceeding €750 million.
Effect of Pillar Two income taxes on income taxes and deferred taxes
IAS 12 Income Taxes requires an entity to calculate its current tax liability using the tax rates (and tax laws) enacted or substantively enacted by the end of the reporting period. Therefore, Pillar Two ‘top-up’ taxes are only factored into the current tax liability calculation if the relevant country has enacted or substantively enacted laws to levy the Pillar Two income taxes before the reporting date.
Deferred tax assets and liabilities are determined using the tax rates expected to apply when the asset is realised, or the liability is settled. Calculations are similarly based on tax rates (and tax laws) enacted or substantively enacted by the end of the reporting period. Determining the appropriate tax rate is usually straightforward when tax is only payable in one jurisdiction. However, working out the future ‘top-up’ tax rate for entities subject to Pillar Two ‘top-up’ taxes would be complicated and may even be impossible to determine.
Amendments to IAS 12
Therefore, changes were made to IAS 12, clarifying how entities subject to the OECD’s Pillar Two ‘top-up’ income taxes will account for their deferred taxes.
The amendments include that:
- Entities will not be permitted to recognise or disclose information about deferred tax assets and deferred tax liabilities related to Pillar Two income taxes (this is a mandatory exception). Entities must then disclose that they have applied the mandatory exception.
- Entities must disclose the amount of current income tax expense/income related to Pillar Two income taxes separately.
- In periods when the Pillar Two income tax legislation is enacted or substantively enacted, but not yet in effect, entities must disclose known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes arising from that legislation.
30 June 2024 financial statements will be impacted differently, depending on the status of Pillar Two legislation in countries where a large multinational group operates.
Status of Pillar Two legislation
For interim and annual reporting periods ending 31 December 2023, we noted that 26 countries had enacted or substantively enacted Pillar Two legislation. During the six months ended 30 June 2024, another six countries, in addition to New Zealand, had also done so, at the time of writing this article. These are Canada, Estonia, Greece, Lithuania, Malta and Norway.
The 32 countries (other than New Zealand) that have now enacted or substantively enacted Pillar Two legislation are listed below:
|
Austria |
Germany |
Norway |
|
Belgium |
Greece |
Romania |
|
Bermuda |
Hungary |
Slovakia |
|
Bulgaria |
Ireland |
Slovenia |
|
Canada |
Italy |
South Korea |
|
Croatia |
Japan |
Sweden |
|
Czech Republic |
Liechtenstein |
Switzerland |
|
Denmark |
Lithuania |
The Netherlands |
|
Estonia |
Luxembourg |
United Kingdom |
|
Finland |
Malaysia |
Vietnam |
|
France |
Malta |
|
Pillar Two legislation is effective in all these countries for years beginning on or after 1 January 2024, except for Estonia, Lithuania and Malta, where relevant laws will only be operational from 2030.
New Zealand
The New Zealand Government enacted legislation in March 2024 to formally implement the Pillar Two rules. We note that Pillar Two legislation will apply to fiscal years beginning on or after 1 January 2025.
Mandatory exception
As the mandatory exception applies immediately from the date the amendments IAS 12 were issued entities will not recognise or disclose information about deferred tax assets and deferred tax liabilities related to Pillar Two income taxes.
Where Pillar Two legislation has yet to be enacted in any jurisdiction where the group operates, there will be no impact on the 30 June 2024 interim and annual financial statements because the mandatory exception is irrelevant.
However, suppose the group operates in any of the 32 named countries whose Pillar Two legislation was enacted before 30 June 2024. In that case, the mandatory exception must be applied in the 30 June 2024 interim and annual financial statements, and this fact must be disclosed.
Mandatory disclosures in 30 June 2024 financial statements
At 30 June 2024, if the legislation has not been enacted or substantively enacted in any jurisdiction where the group operates, the additional disclosures noted in (b) and (c) above are not required in either the 30 June 2024 interim or annual financial statements.
Where Pillar Two legislation has been effective during the reporting period in any jurisdiction where the group operates, the additional disclosures in (b) above are required regarding the portion of Pillar Two income taxes included in the current income tax expense for the period. This disclosure is, therefore:
- Not required in the 30 June 2024 annual financial statements because Pillar Two legislation was not effective in any jurisdiction during the reporting period, which commenced on 1 July 2023
- Required in 30 June 2024 interim financial statements where the entity operates in any of the jurisdictions noted above (other than Estonia, Lithuania and Malta, where laws are not fully operational until 2030).
Need help?
Please contact our Corporate & International Tax team if you require assistance implementing the Pillar Two rules, or our Financial Reporting Advisory team for the financial reporting implications of the new rules, including appropriate disclosures.For more on the above, please contact your local BDO representative.
This article has been based on an article that originally appeared on BDO Australia, read the original article here.