Understanding the impact of Pillar Two taxes on 30 June 2026 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.

The Australian Pillar Two Global and Domestic Minimum Tax (GDMT) laws and rules (also referred to as Pillar Two ‘top-up taxes’) have been enacted and are effective for financial years commencing on or after 1 January 2024 in Australia for large multinational entity (MNE) groups. The Bills imposing the legislation received Royal Assent on 10 December 2024, and the GDMT Rules, in the form of a legislative instrument, were listed on the Federal Register of Legislation on 23 December 2024 (commencing from 24 December 2024).

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 2026.

What is a MNE group?

A MNE group is one with consolidated revenue exceeding €750 million for financial years beginning on or after 1 January 2024.

What are the GDMT laws?

The GDMT laws introduced a new tax system that is separate from the Income Tax Assessment Act 1997. As noted above, the legislation introduced the following taxes, which apply to financial years beginning on or after 1 January 2024:

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 are in jurisdictions 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) applies to financial years beginning on or after 1 January 2025 (i.e. it will apply to 30 June 2026 year-ends for the first time). The UTPR acts as a backstop rule that allows Australia to apply a top-up tax on Australian entities if the group does not have a parent entity in a jurisdiction that has enacted IIR and the group's effective tax rate in another jurisdiction is below 15%, and that jurisdiction has not enacted a QDMTT.

Entities should note that the Pillar Two tax rules are based on the effective tax rate of the entity and not the corporate tax rate. Australian entities that are part of an MNE group with consolidated revenue exceeding €750 million for at least two of the last four years must assess and recognise Pillar Two tax liabilities for the IIR, QDMTT and UTPR as at 30 June 2026. For more information on the GDMT laws and rules refer to our article.

The Proposed Side-by-Side System

There are proposed changes to the GDMT laws that will introduce a new “Side-by-Side” (SbS) package that will effectively exempt the IIR and UTPR from applying to MNE groups whose ultimate parent entity (UPE) is located in the United States (US). Although the SbS safe harbour is proposed to apply for financial years commencing from 1 January 2026, the relevant amendments to the GDMT Laws were not substantially enacted as at 30 June 2026. Therefore, they are not to be recognised in the preparation of the 30 June 2026 financial statements. For more information, see the comments below.

Which entities will recognise QDMTT liabilities?

With QDMTT legislation enacted and in force in Australia, entities must assess whether QDMTT liabilities could be triggered in any Australian group entities that are part of an MNE group for annual and interim periods ending on 30 June 2026. It should be noted that:

Entities reporting for the annual period ending 30 June 2026 should have previously recognised any QDMTT liabilities as at 30 June 2025
Entities reporting for the half-year ending 30 June 2026 should have previously recognised any QDMTT liabilities in their 31 December 2025 annual report, their 30 June 2025 half-year report and their 31 December 2024 annual report (noting that the QDMTT was not substantively enacted for the half-year ended 30 June 2024 and, therefore, no QDMTT liability would have been recognised for the half-year ended 30 June 2024).

Despite Australia having a corporate tax rate of 30%, it cannot automatically be assumed that Australian entities will not have a QDMTT liability. There may be instances in which various tax concessions result in a tax rate below 15% and, therefore, a QDMTT liability.

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 2026, 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 2026?

In addition to Australia, the following are some countries that had enacted or substantively enacted a QDMTT as at 30 June 2026, with the QDMTT being effective for annual and interim reporting periods ending 30 June 2026, except as noted.

Austria	Hong Kong	Portugal
Bahamas	Hungary	Qatar
Bahrain	Indonesia	Romania
Barbados	Ireland	Singapore
Belgium	Isle of Man	Slovakia
Bermuda ^{Note 1}	Israel ^{Note 2}	Slovenia
Brazil	Italy	South Africa
Bulgaria	Jersey ^{Note 1}	South Korea ^{Note 2}
Cabo Verde ^{Note 2}	Kenya	Spain
Canada	Kuwait	Sweden
Croatia	Liechtenstein	Switzerland
Cyprus	Luxembourg	Thailand
Czech Republic	Malaysia	The Netherlands
Denmark	Mauritius	Turkey
Finland	New Zealand ^{Note 2}	United Arab Emirates
France	Nigeria ^{Note 1}	United Kingdom
Germany	North Macedonia	Uruguay ^{Note 2}
Gibraltar	Norway	Vietnam
Greece	Oman	Zimbabwe ^{Note 1}
Guernsey	Poland

Note 1: These countries have implemented a minimum 15% corporate tax rate which is levied on subsidiaries of MNEs, and is not always the same as the QDMTT. If there is a difference between this tax and a QDMTT calculation, it could result in a parent entity being required to pay an IIR top-up tax or other group members paying UTPR tax.

Note 2: The QDMTT applies for financial years commencing on or after 1 January 2026 so is only considered for Pillar Two tax liabilities for the half-year ended 30 June 2026. It should be considered in the annual financial statements for years ending 31 December 2026.

Australian groups should consider whether a QDMTT liability must be recognised for subsidiaries operating in the above jurisdictions for both annual and interim periods ending on 30 June 2026.

Which entities will recognise IIR liabilities?

As with the QDMTT, the IIR legislation has also been enacted and has been effective in Australia since 1 January 2024. Australian parent entities must, therefore, assess whether they have a tax liability as at 30 June 2026 based on the IIR.

An Australian group without a foreign parent entity/ies, and no foreign subsidiaries or foreign branches, will not have an IIR tax liability because it will not be part of an MNE group.

An Australian group with a foreign parent entity/ies will generally only recognise an IIR tax liability if:

None of its foreign parent entities are subject to the IIR, and
It has subsidiaries operating in countries that have not adopted the QDMTT.

The highest-level foreign parent entity whose country has an IIR is the entity that will be subject to IIR top-up tax.

Which countries have enacted or substantively enacted an IIR as at 30 June 2026?

In addition to Australia, the following are some countries that had enacted or substantively enacted an IIR as at 30 June 2026, with the IIR being effective for annual and interim reporting periods ending 30 June 2026.

Austria	Hungary	Portugal
Belgium	Indonesia	Qatar
Bulgaria	Ireland	Romania
Canada	Isle of Man	Singapore
Croatia	Italy	Slovenia
Cyprus	Japan	South Africa
Czech Republic	Jersey	South Korea
Denmark	Liechtenstein	Spain
Finland	Luxembourg	Sweden
France	Malaysia	Switzerland
Germany	New Zealand	Thailand
Gibraltar	North Macedonia	The Netherlands
Greece	Norway	Turkey
Guernsey	Oman	United Kingdom
Hong Kong	Poland	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 or interim financial statements for 30 June 2026.

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

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 annual and interim financial statements for 30 June 2026 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 India or China (and the US, subject to proposed Side-by-Side safe harbour rules that currently would only apply to the US, discussed further below).

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 at the time the financial statements are prepared.

Amendments to IAS 12

To overcome these challenges, changes were made to IAS 12, providing a mandatory temporary exception that prevents entities from accounting for or disclosing 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 2026 financial statements

IAS 12, paragraphs 88A to 88D, introduced new disclosures for Pillar Two income taxes. For periods ending on 30 June 2026, 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, 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, they 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 foreign subsidiaries and 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 2026 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 2026

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 were not enacted or substantively enacted by 30 June 2026. 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.

Proposed Side-by-Side System for US parented MNE groups

The above comments do not take account of future amendments that will be introduced in Australia as a result of the recent announcements of additional safe harbours by the OECD, These new safe harbours are expected to be effective for financial years starting on or after 1 January 2026, however, as they have not been substantially enacted at 30 June 2026 they are not to be recognised for the 30 June 2026 financial statements. For your information only, see details of these proposed changes below.

In January 2026, the OECD Side-by-Side (SbS) Package introduced two separate but related safe harbours that also need to be considered in the context of any global and domestic minimum tax liability. This is particularly important for US-based UPEs of MNE groups.

1. Side-by-Side (SbS) Safe Harbour – Full IIR and UTPR exemption

Where an MNE group's UPE is located in a jurisdiction with a Qualified SbS Regime, the group may elect the SbS Safe Harbour. The result is that the Pillar Two top-up tax is deemed to be zero for both IIR and UTPR purposes across the group's worldwide operations. However, any local QDMTT remains payable. Only the US currently qualifies as a Qualified SbS Regime

2. UPE Safe Harbour – exemption only for the UPE jurisdiction from UTPR

Where the UPE is located in a jurisdiction with a Qualified UPE Regime, the top-up tax attributable to the UPE jurisdiction is deemed to be zero for UTPR purposes. This means that other countries cannot apply UTPR to profits located in the UPE jurisdiction. However, the remainder of the group continues to be subject to the normal Pillar Two rules.

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.