The Pillar Two rules apply to multinational enterprises that have consolidated revenues (which, as defined by the OECD, include any form of income and are therefore not limited to revenue recognised in accordance with IFRS 15) of €750m in at least two of the last four years.

Pillar Two applies if a jurisdiction in which the group operates has passed the rules into national legislation – this could be the jurisdiction of the ultimate parent entity or, if the IIR Pillar Two legislation is not yet in effect in the ultimate parent entity’s jurisdiction, an intermediate parent entity in the multinational enterprise that is subject to top-up tax. For UTPR, this could even just be a subsidiary in the multinational enterprise. Enacted QDMTT rules could also increase the tax liability of the group.

A multinational enterprise might therefore be subject to Pillar Two taxes, and within the scope of the IAS 12 disclosure requirements, even if the jurisdiction of the ultimate parent entity has not yet enacted the Pillar Two rules.

Applying the Pillar Two rules and determining the impact are likely to be very complex, and this poses a number of practical challenges. Additionally, how to account for the top-up tax (whether GloBE or a GloBE qualifying domestic minimum top-up tax) under IAS 12 was not immediately apparent.

On 23 May 2023, the IASB issued narrow-scope amendments to IAS 12. The amendments provide a temporary exception from the requirement to recognise and disclose deferred taxes arising from enacted or substantively enacted tax law that implements the Pillar Two model rules published by the OECD, including tax law that implements QDMTT described in those rules.

The amendments to IAS 12 make it clear that entities subject to Pillar Two rules must ignore the deferred tax implications of enacted or substantively enacted Pillar Two legislation in their IFRS® financial statements. However, for annual reporting periods beginning on or after 1 January 2023, these entities will need to provide some additional disclosures about current taxes in their annual financial reports, as described below.

As explained above, the one impact is that entities are prohibited from recognising or disclosing deferred tax implications arising from Pillar Two. A second impact is that the narrow-scope amendments to IAS 12 introduced targeted disclosure requirements for affected companies. They require entities to disclose:

Due to the complexity of the Pillar Two rules, we expect that it will take time for some entities to carry out their impact assessments following the legislation’s announcement. As a result, management might be unable to quantify and therefore disclose the detailed effects. However, an entity might be able to provide qualitative information – for example, if a material portion of its business operates in relatively low-tax jurisdictions that are likely to be impacted.

Entities might consider disclosing the expected impact of Pillar Two if the local jurisdiction has not yet announced or enacted the changes before the financial statements are authorised for issue. [IAS 1 para 17(c)].

The cash tax impact of the Pillar Two rules on going concern should be reflected in that assessment once the local legislation is announced rather than from when it is substantively enacted. This is because the going concern assessment includes all ‘expected’ future cash outflows and takes into account all available information about the future. [IAS 1 para 26].

Similarly, if an entity applies post-tax cash flows in a value-in-use calculation of the recoverable amount of an asset or a cash-generating unit when performing an impairment test, the cash tax impact of the Pillar Two rules should be reflected in those cash flows. The timing of this would be based on a market participant’s view which would likely be once the local legislation is announced rather than from when it is substantively enacted. Generally, the inclusion of tax cash flows would not impact the recoverable amount, because the entity would also adjust the post-tax discount rate used (see FAQ 24.87.2).

Some reporting entities might need to consider the Pillar Two requirements before the amendments to IAS 12 are effective in their jurisdiction – for example, where a multinational entity within the scope of the Pillar Two model rules has a period end that falls after the date when Pillar Two legislation is enacted (or substantively enacted) in the entity’s jurisdiction, but before the date when the amendments to IAS 12 providing the exception for deferred tax accounting becomes effective or is endorsed (if there is any local endorsement process in the entity’s jurisdiction). Reporting entities that need to consider the Pillar Two requirements before the IAS 12 amendments are endorsed might still be able to avoid recognition of deferred tax that would have arisen from the implementation of Pillar Two rules.

In determining whether deferred tax should be recognised at the reporting date, entities should consider that there is an indication in the Basis for Conclusions of IAS 12 (at para BC99(b)) that the IASB did not conclude whether there would be deferred tax implications if no exception was proposed. In fact, the Basis for Conclusions paragraph highlights that respondents were unclear as to whether and how IAS 12 would be applied, confirming that the existing requirements are unclear.

Affected entities might need to develop an accounting policy in accordance with paragraph 10 of IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’. In developing that policy, entities might conclude that Pillar Two legislation does not require adjustments or additions to the existing deferred tax balances. In developing an accounting policy, an entity might consider:

Listed entities should take into account any views of their local regulator in developing an accounting policy.

The Pillar Two rules are intended to be implemented as part of a common approach, as agreed by the OECD members, and to be brought into domestic legislation by 2023. However, each jurisdiction will need to determine if and when the rules will be enacted and effective. For example, at the time of issuing this publication, the Pillar Two rules have been enacted in the United Kingdom and are effective for accounting periods beginning on or after 31 December 2023, except for the UTPR which is still in draft and expected to be effective after 31 December 2024 at the earliest. The EU has issued a Directive to require its Member States to enact domestic legislation for the IIR from 2024 and the UTPR from 2025. For the status of Pillar Two implementation in different countries and regions, visit PwC’s Pillar Two Country Tracker.

The amendments to IAS 12 are required to be applied immediately (subject to any local endorsement processes) and retrospectively in accordance with IAS 8, including the requirement to disclose the fact that the exception has been applied if the entity’s income taxes will be affected by enacted or substantively enacted tax law that implements the Pillar Two rules. The disclosures relating to the known or reasonably estimable exposure to Pillar Two income taxes are required for annual reporting periods beginning on or after 1 January 2023, but they are not required to be disclosed in interim financial reports for any interim period ending on or before 31 December 2023.

For more about Pillar Two model rules and their impact on businesses, visit PwC’s Pillar Two Readiness microsite.

For more information, contact Dave Walters or Gary Berchowitz.

The Pillar Two top-up tax expense is an income tax within the scope of IAS 12 and is recognised as an income tax expense in the separate financial statements of the entity liable to pay the top-up tax expense. If the jurisdiction where a parent of a multinational enterprise sits has enacted IIR Pillar Two rules, the parent is the primary obligor of such top-up taxes. In our view the subsidiary entity that gives rise to the top-up taxes should not recognise an expense. This is because the IFRS accounting framework does not generally allow push down accounting. Absent such a requirement, push down accounting is not a permissible accounting policy. An analogy to the requirements in IFRS 2 for group share-based payment arrangements is not appropriate because the subsidiary does not receive any goods or services as a consequence of the parent paying the top-up tax and the tax is not settled by the parent on the subsidiary’s behalf. There may be alternative possible approaches.

Yes, the IAS 12 scope exception can typically be applied. Each country is required to self certify whether their DMTT is ‘qualifying’. The self certification is to be subject to a peer review, however the self certified QDMTT is generally assumed to be qualifying until there is a successful challenge to deem it non-qualifying. The expectation is that any removal of qualifying status by the peer review is prospective not retrospective but this has yet to be confirmed.

A non-qualifying DMTT does not apply the exception.

No. As stated in para BC107 of the basis for conclusions to IAS 12, the para 88C disclosure requirement was brought into the standard as enacted Pillar Two legislation could create exposures that are not yet reflected in an entity’s income tax expense for the period and so there was an information need. The entity’s exposure to be disclosed relates only to the exposures impacting the entity’s income tax expense. It does not relate to exposures impacting other income statement line items, such as adjustments to the measurement of assets because of reduced cash inflows. For example, an investment entity that recognises its investments on a fair value basis might not have a Pillar Two tax expense of its own to account for but its investees might be exposed, ultimately impacting the investees’ fair value. There is no requirement to disclose this exposure under paragraph 88C of IAS 12 although, if the impact on the investees’ fair value going forward could be material, the investment entity might choose to disclose that fact.

Yes. IAS 12 para 4A confirms that Pillar Two taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules, are income taxes in the scope of IAS 12. IAS 34 para B13 says the same accounting and recognition measurement principles are applied in an interim financial report as are applied in annual financial statements. Therefore, Pillar Two income taxes should be accounted for in interim periods.

IAS 34 para B12 requires the interim period income tax expense to be accrued using the tax rate that is applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate is applied to the pre-tax income of the interim period. Taxation is assessed based on annual results and, accordingly, determining the tax charge for an interim period will involve making an estimate of the likely effective tax rate for the year.

IAS 34 para B14 requires, to the extent practical, a separate estimated average annual effective income tax rate to be determined for each taxing jurisdiction and for that rate to be applied individually to the interim period pre-tax income of each jurisdiction.

To apply these requirements an entity will need to estimate its annual effective tax rate for each jurisdiction including P2. The calculation of the effective tax rate should be based on an estimate of each jurisdiction’s income tax charge for the year (which includes P2) expressed as a percentage of the jurisdiction’s expected accounting profit. This percentage is then applied to the jurisdiction’s interim result, and the tax is recognised ratably over the year as a whole.

Set out below is an illustration of how a jurisdiction’s effective tax rate (ETR) is calculated.

Illustration of the P2 top up tax calculation

EX 35.23.4 explains the approach to apply to estimate the interim period tax charge or benefit when there are intra period losses. It notes that expected annual effective tax rates should be applied to interim losses as well as to profits.

When there are intra period losses, the general approach for estimating the effective tax rate (ETR) for the year should be used as explained in Question 5 above. However, there are two acceptable approaches to recognising the Pillar Two (‘P2’) component of the estimated tax charge.

The first approach is to recognise the tax benefit and income tax asset that arises from the application of IAS 34’s simplified ETR methodology. Recognition of the asset allows users an insight into the expected tax rate for the full year. In subsequent interim periods the income tax asset recognised in the first interim period reverses.

The second approach is to consider the tax benefit and tax asset that arises in relation to the P2 component of the ETR to be a deferred tax asset for a loss carry forward. However, IAS 12 prohibits the recognition of deferred tax for P2. Therefore, no asset (or related tax benefit) is recognised in the first interim period. In subsequent interim periods the annual estimated P2 tax charge is recognised on a catch-up basis where the overall year-to-date accounting profit becomes positive, that is by multiplying the P2 ETR component by the cumulatively positive trading profits at that point.

Extending the example in Question 5, Jurisdiction A’s estimated annual accounting profit is C1000 but in H1 there is an accounting loss of C5000. Using Jurisdiction A’s estimated ETR of 22.1%, the following tables set out the interim tax accounting under the 2 approaches.

EX 35.23.5 notes if there are expense items that are disallowed for tax purposes, these will increase the effective tax rate. Where the disallowable items have a distortive effect on the effective tax rate these items are excluded from the effective tax rate calculation and instead dealt with in the interim periods in which they arise. This is consistent with the approach in paragraph B19 of IAS 34 for tax benefits that relate to a one-time event.

Therefore, the P2 tax effect of the one-off item of expense should be dealt with in the interim period in which the one-off item is recognised.

One approach to measure the tax effect of the one-off item is to perform the calculations set out in Question 5 and determine what the interim period tax charge and liability would be with and without the one-off item. The difference between the two amounts is recognised in the interim period the one off item is recognised. There may be other acceptable approaches.