Understanding the impact of Pillar Two taxes on 31 December 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 a 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 31 December 2025.

What are the GDMT laws?

The GDMT laws introduced a new tax system that is separate from the Income Tax Assessment Act 1997. 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. 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 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 could be triggered in any Australian group entities that are part of an MNE group for annual and interim periods ending on 31 December 2025. It should be noted that:

• Entities reporting for the annual period ending 31 December 2025 should have previously recognised QDMTT liabilities as at 31 December 2024
• Entities reporting for the half-year ending 31 December 2025 should have previously recognised QDMTT liabilities in their 30 June 2025 annual report and their 31 December 2024 half-year report.

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 31 December 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 31 December 2025?

In addition to Australia, the following are some countries that have enacted or substantively enacted a QDMTT as at 31 December, with the QDMTT being effective for annual and interim reporting periods ending 31 December 2025.

Austria	Hong Kong	Portugal
Bahamas	Hungary	Qatar
Bahrain	Ireland	Romania
Barbados	Italy	Singapore
Belgium	Indonesia	Slovakia
Bermuda Note 1	Isle of Man	Slovenia
Bulgaria	Jersey Note 1	South Africa
Brazil	Kenya	Spain
Canada	Kuwait	Sweden
Croatia	Liechtenstein	Switzerland
Cyprus	Lithuania	Thailand
Czech Republic	Luxembourg	The Netherlands
Denmark	Malta	Turkey
Finland	Malaysia	United Arab Emirates
France	Mauritius Note 2	United Kingdom
Germany	North Macedonia	Vietnam
Gibraltar	Norway	Zimbabwe
Greece	Oman
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: In Mauritius, the QDMTT applies to years ending on or after 1 January 2025, but the law was only enacted in August 2025. Therefore, no QDMTT liability would have been recognised in either annual or half-year financial statements for the period ending 30 June 2025.

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 31 December 2025.

Which entities will recognise IIR liabilities?

As with the QDMTT, the IIR legislation has also been enacted and is effective in Australia since 1 January 2024. Australian parent entities must, therefore, assess whether they have a tax liability as at 31 December 2025 based on the IIR.

Which countries have enacted or substantively enacted an IIR as at 31 December 2025?

In addition to Australia, the following are some countries that had enacted or substantively enacted an IIR as at 31 December 2025, with the IIR effective for annual and interim reporting periods ending 31 December 2025.

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

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 31 December 2025.

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 31 December 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 (subject to incoming side-by-side safe habour rules discussed further below), India and China.

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 31 December 2025 financial statements

IAS 12, paragraphs 88A to 88D, introduced new disclosures for Pillar Two income taxes. For periods ending on 31 December 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, 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 an Australian group with a foreign parent entity that has enacted or substantively enacted IIR legislation that 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 31 December 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 31 December 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 were not enacted or substantively enacted by 31 December 2025. Although none of the disclosures are mandatory for these entities, we nevertheless recommend that financial statements of individual foreign subsidiaries in the process of adopting Pillar Two top-up taxes include explanations of the impacts in future financial years.

Proposed modifications 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 OECD announcements of additional safe harbours, one of which  exempts US parented MNE groups from the IIR and UTPR.

More information

Please visit our website for the most up-to-date information on 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.