Pillar two disclosures in 30 June interim and annual financial statements
The OECD’s Pillar Two ‘top-up’ income taxes is a hot topic globally at the moment, with many jurisdictions in the process of implementing legislation to impose a domestic minimum tax rate of 15 percent for entities part of a group with consolidated revenue exceeding €750 million. Ordinarily, changes in tax rates could affect the measurement of deferred tax assets and liabilities because IAS 12 Income Taxes requires an entity to measure these using tax rates that have been enacted or substantively enacted at the end of the reporting period.
Recent amendments to IAS 12 Income Taxes clarify how entities potentially subject to the OECD’s Pillar Two ‘top-up’ income taxes will account for their deferred taxes:
- 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.
The good news is that these amendments are not likely to have any significant impact on 30 June 2023 interim or annual financial statements. But it is important to watch this space. Please read on to find out why.
Status of Pillar Two legislation
At the time of writing, most jurisdictions worldwide had yet to pass final legislation concerning rules for determining the amount of Pillar Two top-up taxes. However, the following three countries have done so:
- South Korea – enacted 31 December 2022, effective for years beginning on or after 1 January 2024
- Japan – enacted 28 March 2023, effective for years beginning on or after 1 April 2024
- UK – enacted 11 July 2023, effective for years beginning on or after 31 December 2023.
In New Zealand, the Government has introduced legislation - Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (“the Bill”) - to adopt the Pillar Two Rules in New Zealand, with the application date to be determined by Parliament. At the time of writing, this Bill has passed its first reading in Parliament.
The Bill proposes that the Pillar Two Rules will only apply if a “critical mass” of countries adopt them. If that occurs, the Pillar Two Rules will apply no earlier than January 2024 for New Zealand MNE operations under the income inclusion rule and 1 January 2025 for overseas MNEs subject to the undertaxed profits rule.
It is anticipated that the Pillar Two Rules will apply to very few New Zealand taxpayers as the current threshold is global minimum turnover of EUR 750M, and the New Zealand corporate tax rate is above 15%.
The mandatory exception applies from when the amendments to NZ IAS 12 take effect in New Zealand , being 10 August 2023. It results in entities not needing to 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 2023 interim and annual financial statements because the mandatory exception is not relevant. This would include the UK, as the enactment date was after 30 June 2023.
However, suppose the group operates in countries such as Japan and South Korea, whose Pillar Two legislation was enacted before 30 June 2023. In that case, the mandatory exception must be applied in 30 June 2023 interim and annual financial statements, and this fact must be disclosed.
Similarly, at 30 June 2023, when legislation had 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 2023 interim or annual financial statements.
The additional disclosure noted in (b) above applies where Pillar Two has been effective during the reporting period, and the current income tax expenses include a portion of Pillar Two income taxes. This disclosure is therefore not required in the 30 June 2023 interim and annual financial statements because Pillar Two legislation was not effective in any jurisdiction during the reporting period.
The additional disclosure in (c) applies only where Pillar Two legislation has been enacted or substantively enacted, but has yet to be effective, for example, in South Korea and Japan.
Both these disclosures are not required in 30 June 2023 interim and annual financial statements because of transitional relief provided by the amendment to NZ IAS 12:
- Entities need only provide additional disclosures noted in (b) and (c) above for annual reporting periods beginning on or after 1 January 2023 that end on or after 30 June 2023
- Entities preparing interim reports need not provide the additional disclosures for interim periods ending on or before 31 December 2023.
Recommended disclosures for 30 June 2023
Despite the transitional exemptions for disclosures noted above, entities who may be subject to the Pillar Two rules should consider disclosing information regarding the potential for tax effects of the Pillar Two rules in future.
Example wording for 30 June 2023 interim and annual financial statements is shown below for instances where no jurisdictions in a group have passed Pillar Two legislation at 30 June 2023.
In December 2021, the OECD released a draft legislative framework for a global minimum tax that is expected to be used by individual jurisdictions. The goal of the framework is to reduce the shifting of profit from one jurisdiction to another, in order to reduce global tax obligations in corporate structures. In March 2022, the OECD released detailed technical guidance on Pillar Two of the rules and in February 2023 further administrative guidance. The New Zealand Government has announced that it will adopt the Pillar Two rules to apply no earlier than 1 January 2024 for New Zealand MNE operations under the income inclusion rule and 1 January 2025 for overseas MNEs subject to the undertaxed profits rule. Legislation to effect these Pillar Two changes has not yet been passed in New Zealand. If tax laws are changed in New Zealand and other jurisdictions where the Group operates, the tax obligations of the group may increase.
As at the date of approval of the (interim) financial statements, none of the jurisdictions where the Group operates have passed legislation that brings these tax changes into law. Therefore, the Group is unable to determine the potential effect of any future changes to legislation.
The above wording should be tailored where some of the group’s operations are in jurisdictions that have passed Pillar Two legislation at 30 June 2023.
Please contact our Corporate & International Tax Management team if you require assistance implementing the Pillar Two rules, or our IFRS Advisory team for the financial reporting implications of the new rules.
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.