Pillar Two disclosures in 31 December 2023 interim and annual financial statements

The Organization for Economic Cooperation and Development (OECD)’s Pillar Two ‘top-up’ income tax regime will soon be a reality as more and more countries start implementing legislation to impose the global mininum 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. As of 31 December 2023, 26 countries had enacted Pillar Two legislation, with another following in early January 2024.

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. Pillar Two ‘top-up’ taxes are therefore 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

Changes were therefore made to IAS 12 which clarify how entities subject to the OECD’s Pillar Two ‘top-up’ income taxes will account for their deferred taxes. The equivalent amendments were made to AASB 112 Income Taxes, contained in AASB 2023-2 in Australia. The amendments include that:

1. 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.
2. Entities must disclose the amount of current income tax expense/income related to Pillar Two income taxes separately.
3. 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.

31 December 2023 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 30 June 2023, we noted that these amendments were not likely to have a significant impact on 30 June 2023 interim or annual financial statements. This was because only three countries had enacted or substantively enacted Pillar Two legislation at that time. At 31 December 2023, 26 countries had enacted or substantively enacted Pillar Two legislation:

Austria	Germany	Slovakia
Belgium	Hungary	Slovenia
Bermuda	Ireland	South Korea
Bulgaria	Italy	Sweden
Croatia	Japan	Switzerland
Czech Republic	Liechtenstein	The Netherlands
Denmark	Luxembourg	United Kingdom
Finland	Malaysia	Vietnam
France	Romania

However, the Pillar Two legislation is only effective in these countries for years beginning on or after 1 January 2024.

Mandatory exception

The mandatory exception applies immediately from when the amendments to AASB 112 were issued in Australia, i.e. 27 June 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 31 December 2023 interim and annual financial statements because the mandatory exception is irrelevant.

However, suppose the group operates in any of the 26 named countries whose Pillar Two legislation was enacted before 31 December 2023. In that case, the mandatory exception must be applied in the 31 December 2023 interim and annual financial statements, and this fact must be disclosed.

Additional disclosures

At 31 December 2023, if the 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 31 December 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 expense includes a portion of Pillar Two income taxes. This disclosure is, therefore, not required in the 31 December 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 where Pillar Two legislation has been enacted or substantively enacted by 31 December 2023, but has yet to be effective (that is, for the 26 countries named above). Our previous article contains an example of what these disclosures might look like.

Transitional relief

The disclosures in (c) must be provided for the 31 December 2023 annual financial statements, but are not required for the 31 December 2023 interim financial statements. This is because the AASB 2023-2 amendments provide transitional relief for entities preparing interim financial statements for any interim period ending on or before 31 December 2023. Disclosures will be required next year, i.e. for interim periods ending 31 March 2024, 30 June 2024, etc.

Recommended disclosures for 31 December 2023

Despite the transitional exemptions for disclosures in interim financial statements, Australian entities who may be subject to the Pillar Two rules should nevertheless consider disclosing information regarding the potential for tax effects of the Pillar Two rules in future. This is because the Australian Government committed to introducing Pillar Two legislation in the May 2023 Federal Budget, and draft legislation is expected soon.

Example wording for 31 December 2023 interim and annual financial statements is shown below for instances where no jurisdictions in a group have passed Pillar Two legislation at 31 December 2023.

The above wording should be tailored where some of the Group’s operations are in jurisdictions that have passed Pillar Two legislation at 31 December 2023. Please reach out to our IFRS & Corporate Reporting team if you need help with this.

More information

Please refer to our website to access the most up-to-date information about the status of Pillar Two implementation around the world.

Need help?

Please contact our Corporate & International Tax team if you require assistance implementing the Pillar Two rules, or our IFRS & Corporate Reporting team for the financial reporting implications of the new rules, including appropriate disclosures.