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Global implementation of Pillar Two and the disclosure implications (UK In brief)
Publication date: 17 Jun 2022 (updated 05 Aug 2022)
uk In brief 2022-32
Key points
- In October 2021, more than 130 countries agreed to implement a minimum tax regime for multinationals (global turnover over €750 million)
- Pillar Two aims to ensure that applicable multinationals pay a minimum effective corporate tax rate of 15%.
- The OECD provided key information on the application of Pillar Two in December 2021, with the release of its ‘model rules’.
- The rules are due to be passed into national legislation and apply for 2023.
- In the UK, draft legislation is expected to be released in the summer of 2022, with substantive enactment in Q1 2023.
- Applying the rules and determining the impact is likely to be very complex and poses a number of practical challenges.
- Entities will need to consider the disclosure implications in advance of the rules becoming effective.
What is the issue?
In October 2021, more than 130 countries agreed to implement a minimum tax regime for multinationals, ‘Pillar Two’. In December 2021, the OECD released the Pillar Two model rules (the Global Anti-Base Erosion Proposal, or ‘GloBE’) to reform international corporate taxation. Large multinational enterprises within the rules’ scope are required to calculate their GloBE effective tax rate for each jurisdiction where they operate and will be liable to pay a top-up tax for the difference between their GloBE effective tax rate per jurisdiction and the 15% minimum rate. It is the ultimate parent entity of the multinational enterprise that is primarily liable for the GLoBE top-up tax in its jurisdiction’s territory.
The goal is to end the ‘race to the bottom’ on tax rates worldwide, under which countries had been competitively cutting corporate taxes to attract businesses with the impact that other countries felt forced to cut taxes to compete.
Top up taxes calculated under GLoBE are to be paid in the jurisdiction of the parent entity of the multinational group, rather than in the low tax territory that triggers the excess payment. Thus, the Pillar Two rules provide for the possibility that jurisdictions introduce their own domestic minimum top-up tax based on the GloBE mechanics to avoid any ‘tax leakage’. If The GLoBE effective tax rate domestically is 15% or more, no GLoBE top-up tax will be payable.
Therefore, we expect many countries to engage in domestic tax policy reforms and we have already seen a number of countries propose introducing their own minimum tax regimes. Notwithstanding any new local minimum tax regime which may be designed to reduce or eliminate the GloBE top up tax, additional top up tax under GLoBE may still be due. This will depend on the local effective tax rate calculation according to the specific rules set out in the Pillar Two regulations.
The Pillar Two rules are due to be passed into national legislation. In the UK, draft legislation was released on 20 July 2022, with substantive enactment expected in Q1 2023. The rules are to be effective for years beginning on or after 31 December 2023. It is also proposed that a domestic minimum tax is introduced alongside the Pillar Two rules. This legislation has not yet been released.
Applying the rules and determining the impact are likely to be very complex and pose a number of practical challenges. Additionally, how to account for the top-up tax under IAS 12 is not immediately apparent. Entities that have to pay a top-up tax (whether GLoBE or a domestic minimum tax) need to consider whether these additional taxes impact the recognition and measurement of their deferred tax assets and liabilities.
In addition, entities will also need to consider the disclosure implications as there will be a need to make disclosures in advance of the rules becoming effective. This is because IAS 10 para 22(h) and FRS 102 para 32.11(h) require disclosure of material non-adjusting post balance sheet events. Changes in tax rates or laws enacted or announced after the reporting period that have a significant effect on current and deferred taxes are an example of such an event.
This In brief deals with the disclosure requirements. Publication of draft local legislation to implement the rules is an announcement of a change in tax law. Therefore, financial statements issued after the draft legislation’s publication will need to disclose the effect on current and deferred taxes of the announced legislation, if significant.
We expect that it will take time for entities to carry out their impact assessments following the legislation’s release in July. As a result, management is unlikely to be able to quantify and therefore, disclose the effect at this stage. Indeed, as noted above, it is not immediately apparent how to account for the top-up tax under IAS 12 and so disclosing the effect on current and deferred taxes is unlikely to be possible at this stage. Further guidance on the deferred tax accounting will be issued in due course.
Where entities are still evaluating the impact of the rules, a statement to that effect is required. Management will need to be able to support any statement that Pillar Two will not have a material impact, and we would expect the impact assessments to be complete if this is being asserted.
For 31 December 2022 half year reporters we do not expect entities to be able to make substantive quantitative comments or be able to assert there is no material impact expected. We set out below illustrative disclosure.
"During 2021, the OECD published a framework for the introduction of a global minimum effective tax rate of 15%, applicable to large multinational groups. On 20 July 2022, HM Treasury released draft legislation to implement these 'Pillar 2' rules with effect for years beginning on or after 31 December 2023. The Group is reviewing these draft rules to understand any potential impacts."
For balance sheet dates after substantive enactment of the legislation, entities will need to account for the impact Pillar Two has on the recognition and measurement of their deferred tax assets and liabilities. [IAS 12 para 47]. [FRS 102 para 29.12].
The cash tax impact of the Pillar Two rules on going concern and viability assessments should be reflected in those assessments once the local legislation is published rather than from when it is substantively enacted. This is because these assessments include all “expected” future cash outflows and take into account all available information about the future. [IAS 1 para 26].
In addition, where entities voluntarily disclose an expected future effective tax rate in their narrative front half reporting, it will be necessary to ensure that the impact of Pillar Two is reflected in those disclosures once the legislation has been published. If not, any guidance should be caveated to inform readers that the impact of Pillar Two on the rate has yet to be determined.
What is the impact and for whom?
The Pillar Two rules apply to multinational enterprises that have consolidated revenues of €750m in at least two out of the last four years. The following entities are excluded and not subject to the rules:
- government entities;
- international organisations;
- non-profit organisations; and
- pension funds or investment funds that are ultimate parent entities of a multinational group (and certain holding vehicles of such entities).
However, this exclusion does not affect the multinational group owned by such entities. The group will remain in the rules' scope if it as a whole otherwise meets the consolidated revenue threshold.
Where do I get more details?
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