Understanding the impact of Pillar Two taxes on 30 June 2025 financial statements

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.

Australian entities that are part of an MNE group must, therefore, consider the impact of these new rules on the measurement of current tax liabilities in both annual and interim financial statements for periods ending on 30 June 2025.

What are the GDMT laws?

The GDMT laws introduce a new tax system that is separate from the Income Tax Assessment Act 1997. The new legislation introduces:

• The income inclusion rule (IIR), a top-up tax payable by Australian parent entities of MNE groups where any of their subsidiaries have an effective tax rate of less than 15% (this only applies if there are no foreign parent entities of the Australian parent that have a substantively enacted IIR), and
• The qualifying domestic minimum top-up tax (QDMTT), a top-up tax where an Australian member of an MNE group has an effective tax rate of less than 15%.

In addition, the undertaxed profits rule (UTPR) will apply to financial years beginning on or after 1 January 2025. The UTPR acts as a backstop rule that allows Australia to apply a top-up tax on Australian entities if the group has a parent entity in a jurisdiction that has not enacted IIR, the group's effective tax rate in another jurisdiction is below 15%, and that jurisdiction has not enacted QDMTT.

Which entities will recognise QDMTT liabilities?

With QDMTT legislation enacted and in force in Australia from 24 December 2024, entities must assess whether QDMTT liabilities will be triggered in any Australian group entities that are part of an MNE group for annual and interim periods ending on 30 June 2025 (noting that for half-years ending 30 June 2025, entities should already have recognised QDMTT liabilities as at 31 December 2024).

Entities must also assess whether QDMTT liabilities could be triggered for any foreign subsidiaries or foreign branches of Australian groups. This could occur if the foreign subsidiaries are tax residents of a foreign jurisdiction that has also enacted or substantively enacted a QDMTT by 30 June 2025, and where the QDMTT is effective in that jurisdiction for the relevant accounting period.

Which countries have enacted or substantively enacted a QDMTT as at 30 June 2025?

In addition to Australia, the following are some countries that had enacted or substantively enacted a QDMTT as at 30 June 2025, effective from 1 January 2024.

Austria	Greece	Romania
Barbados	Hungary	Slovakia
Belgium	Ireland	Slovenia
Bulgaria	Italy	South Africa
Canada	Latvia	Spain
Croatia	Liechtenstein	Sweden
Czech Republic	Lithuania	Switzerland
Denmark	Luxembourg	The Netherlands
Finland	Malta	Turkey
France	North Macedonia	United Kingdom
Germany	Norway	Vietnam
Gibraltar	Portugal	Zimbabwe

Australian groups should consider whether a QDMTT liability must be recognised for subsidiaries operating in the above jurisdiction for both annual and interim periods ending on 30 June 2025.

In addition, the following countries have enacted or substantively enacted a QDMTT as at 30 June 2025, effective from 1 January 2025. Entities preparing interim financial statements for the half-year ending 30 June 2025 should also consider whether any QDMTT liabilities must be recognised in 30 June 2025 half-year financial statements.

Bahamas	Isle of Man	Portugal
Bahrain	Jersey	Qatar
Bermuda	Kenya	Singapore
Brazil	Kuwait	Thailand
Cyprus	Malaysia	United Arab Emirates
Guernsey	Oman
Indonesia	Poland

Which entities will recognise IIR liabilities?

As with the QDMTT, the IIR legislation has also been enacted and is effective in Australia from 1 January 2024. Australian parent entities must, therefore, assess whether they have a tax liability as at 30 June 2025 based on the IIR.

Which countries have enacted or substantively enacted an IIR at 30 June 2025?

In addition to Australia, the following are some countries that had enacted or substantively enacted an IIR as at 30 June 2025, effective from 1 January 2024.

Austria	Germany	Romania
Belgium	Greece	Slovenia
Bulgaria	Hungary	South Africa
Canada	Ireland	South Korea
Croatia	Italy	Spain
Cyprus	Japan	Sweden
Czech Republic	Liechtenstein	The Netherlands
Denmark	Luxembourg	Turkey
Finland	North Macedonia	United Kingdom
France	Norway	Vietnam

As the IIR is levied on the highest-level foreign parent entity whose country has an IIR, Australian groups with parent entities located in jurisdictions noted in the tables above will generally not have to recognise an IIR liability in the annual financial statements for 30 June 2025.

However, an Australian group with subsidiaries located in countries that are not subject to the QDMTT will need to recognise an IIR liability if its foreign parent entity(ies) are located in jurisdictions not shown in the table above.

Entities preparing interim financial statements for the half-year ended 30 June 2025 must consider that the following countries had also enacted or substantively enacted an IIR as at 30 June 2025, effective from 1 January 2025.

Curacao	Jersey	Qatar
Gibraltar	Malaysia	Singapore
Guernsey	New Zealand	Switzerland
Indonesia	Poland	Thailand
Isle of Man	Portugal

Also, as some countries have delayed the start dates for the IIR and/or QDMTT to years starting on or after 1 January 2025, the IIR may apply to an Australian parent entity with a subsidiary or ultimate parent entity in these countries until the IIR and/or QDMTT start in these countries.

Which entities will recognise UTPR liabilities?

The UTPR is part of the GDMT laws enacted in Australia in December 2024, and is effective for financial years commencing from 1 January 2025. Australian entities that are part of an MNE group must therefore assess, and if required, recognise a UTPR liability in interim financial statements for the half-year ended 30 June 2025 if they have a parent entity in a jurisdiction that has not enacted IIR, the group's effective tax rate in another jurisdiction is below 15%, and that jurisdiction has not enacted QDMTT. As many jurisdictions have already enacted an IIR, we expect to mainly see UTPR liabilities where the parent entity is based in the USA, India, Hong Kong and China.

Proposed modifications for US parented MNE groups

The above comments do not take account of possible amendments that may be introduced as a result of the recent announcements of an agreement between the US and the other G7 countries to exempt US parented MNE groups from the IIR and UTPR. Details of this agreement have not yet been reflected in the OECD Pillar 2 model rules or the Australian GDMT legislation and rules. 

Effect of Pillar Two income taxes on deferred taxes

Deferred tax assets and liabilities are determined using the tax rates expected to apply when the asset is expected to be realised, or the liability is expected to be settled. Similar to current income taxes, calculations are 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

To overcome these challenges, changes were made to IAS 12, providing a mandatory temporary exception so that entities are not permitted to account for or disclose information regarding deferred taxes arising from any top-up tax required under the Pillar Two rules. Without this 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.

Disclosures required in 30 June 2025 financial statements

IAS 12, paragraphs 88A to 88D, introduce new disclosures for Pillar Two income taxes. For periods ending on or after 30 June 2025, Australian entities will need to disclose the following:

• The amount of the current income tax expense (income) relating to Pillar Two income taxes (paragraph 88B)
• That the entity has applied the mandatory exception for recognising and disclosing information about deferred taxes related to Pillar Two income taxes (paragraph 88A)
• In periods when the Pillar Two income tax legislation is enacted or substantively enacted, but not yet in effect (this applies to the UTPR in Australia), 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 (paragraph 88C-88D).

Different countries are at varying stages of their Pillar Two journey. While rules for IIR and QDMTT are already enacted and in force in many jurisdictions, in some cases, the rules only become effective in future periods. It is, therefore, important that the notes to the financial statements explain and, where possible, quantify the effect on the financial statements of future periods.

An example of this is where an Australian group has a foreign parent entity that has enacted or substantively enacted legislation for the IIR, which is not yet in effect. The Australian parent entity is currently ‘picking up the tab’ for the group’s IIR liability, but in future, the IIR liability will be recognised by the foreign parent. The notes to the 30 June 2025 financial statements should explain and quantify this effect. Our previous article contains an example of what these disclosures might look like.

Recommended disclosures for 30 June 2025

In addition to the countries noted above, which have already legislated the QDMTT and the IIR, many others have committed to a Pillar Two income tax regime, releasing consultation documents and draft legislation, which was not enacted or substantively enacted by 30 June 2025. Despite none of the disclosures being mandatory for these entities, we nevertheless recommend that financial statements of individual foreign subsidiaries that are in the process of adopting Pillar Two top-up taxes include explanations of the impacts in future financial years.

More information

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

Need help?

The rules for measuring QDMTT and IIR tax liabilities are extremely complex. Please contact our Corporate & International Tax team if you require assistance, or our IFRS & Corporate Reporting team for the financial reporting implications of the new rules, including appropriate disclosures.