IASB approves mandatory temporary exception for deferred taxes arising from Pillar Two top up tax

IASB approves mandatory temporary exception for deferred taxes arising from Pillar Two top up tax

As countries or jurisdictions start to enact laws to implement the OECD’s Pillar Two model rules, entities in low tax jurisdictions that are part of large multinational groups with consolidated revenue exceeding €750 million, will be subject to higher tax rates in future (sometimes referred to as ‘top up tax’ or Pillar Two income taxes). Higher tax rates could impact 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.

On 23 May 2023, the International Accounting Standards Board (IASB) approved changes to IAS 12 that will make it easier for entities subject to the Pillar Two income taxes to account for their deferred taxes. The changes introduce a mandatory temporary exception whereby these entities will not be permitted to recognise, or disclose information about, deferred tax assets and deferred tax liabilities related to Pillar Two income taxes.

Mandatory temporary exception

The amendments provide a mandatory temporary exception for entities so that they are not permitted to account for deferred taxes arising from any top up tax required under the Pillar Two rules. Without the change, entities paying top up tax would have difficulty determining the tax rate expected to apply to taxable or deductible temporary differences when they are realised or settled in future.

The IASB decided not to specify how long the temporary exception will be in place.

Additional disclosures

Although the amendments relieve entities from providing the usual deferred tax disclosures related to the Pillar Two income taxes, they introduce the following additional disclosures:

  • That the entity has applied the exception for recognising and disclosing information about deferred tax assets and liabilities relating to Pillar two income taxes
  • The portion of current tax expense related to Pillar two income taxes.

In addition, 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. To meet this disclosure objective:

  • Entities must disclose both qualitative and quantitative information about their exposure to Pillar Two incomes taxes at the end of the reporting period.
  • The information does not have to reflect all the specific requirements of the Pillar Two legislation (can be provided as an indicative range)
  • If not known or reasonably estimable, entities must disclose a statement to this effect and disclose information about its progress in assessing its exposure.

Additional example

The amendments also add an example of what is meant by qualitative and quantitative disclosures about an entity’s exposure to Pillar Two income taxes at the end of the reporting period.

Qualitative information

Quantitative information

  • How an entity is affected by Pillar Two legislation
  • Main jurisdictions in which exposures to Pillar Two income taxes might exist


  • Indication of proportion of the entity’s profits that might be subject to Pillar Two income taxes, and the average effective tax rate applicable to those profits, or
  • Indication of how the entity’s average effective tax rate would have changed if Pillar two legislation had been in effect.


Effective date

The amendments which require an entity to apply the mandatory temporary exception - and to disclose that it has applied the exception – apply immediately (i.e. from 23 May 2023, which is the date when the amendments were issued). They apply retrospectively, which means that any deferred tax recognised in prior years relating to the Pillar Two tax rules must be reversed in prior year comparatives.

The remaining additional disclosures apply for annual periods beginning on or after 1 January 2023. They are not required in interim (half-year) financial statements for interim (half-year) periods ending on or before 31 December 2023.

More information

Please refer to our International Financial Reporting Bulletin for more information.

Need assistance?

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.