A PDF version of this publication is attached here: FASB staff weighs in on tax accounting for OECD Pillar Two taxes (PDF 124kb)

During today’s FASB meeting, the FASB staff discussed an inquiry they received from several accounting firms regarding the accounting for deferred taxes with respect to the minimum tax described in the Global Anti-Base Erosion rules ("GloBE minimum tax" or "Pillar Two tax"). The inquiry focused on whether the GloBE rules would result in GloBE minimum tax-specific deferred taxes and/or trigger the remeasurement of existing deferred taxes considering the GloBE minimum tax rate.

The FASB staff noted that they believe the GloBE minimum tax is an alternative minimum tax as discussed in ASC 740. The FASB staff believes that the authoritative literature in ASC 740-10-30-10 through 30-12 and ASC 740-10-55-31 through 55-32 support this conclusion. According to the staff, the GloBE minimum tax should be viewed as a separate but parallel tax system that is imposed to ensure that certain taxpayers pay at least a minimum amount of income tax.

The FASB staff’s view is based on the facts and circumstances related to the OECD’s GloBE minimum tax. Therefore, any enacted tax law would need to be evaluated to determine if its facts and circumstances are consistent with the minimum tax described in the GloBE rules as outlined in the technical inquiry.

Throughout 2022, various jurisdictions (including the European Union member states, the United Kingdom, Japan, and South Korea) made significant advancements in enacting domestic legislation based upon the GloBE minimum tax rules previously released by the OECD (for more information on the OECD’s international corporate tax reform and Pillar Two’s Model Rules, see our In the loop). The advancement of the GloBE minimum tax, which is based on adjusted financial reporting income, represents an unprecedented worldwide tax development. The FASB staff’s conclusion provides reporting entities with direction on how to account for Pillar Two taxes.

Based on the FASB staff’s conclusion that the GloBE minimum tax is an alternative minimum tax, reporting entities would not recognize or adjust deferred tax assets and liabilities for the estimated future effects of Pillar Two taxes as long as enacted legislation is consistent with the OECD’s GloBE Model Rules and associated commentary. Rather, the tax would be accounted for as a period cost impacting the effective tax rate in the year the GloBE minimum tax obligation arises.

The number of companies expected to be impacted by Pillar Two continues to expand as more jurisdictions introduce and advance domestic legislation based upon the Pillar Two rules. Although OECD members agreed that the Pillar Two rules are intended to be implemented as part of a common approach, and brought into domestic legislation by 2023, each jurisdiction will need to determine if and when the rules will be enacted and effective. While the majority of Pillar Two legislation is anticipated to be effective in 2024 and beyond, enactment in 2023 would likely trigger disclosure requirements and should continue to be assessed by multinational entities that would potentially be impacted.

Concurrent with these developments from the FASB, the IASB is in the process of standard-setting in response to the imminent implementation of the Pillar Two Model Rules. On January 9, 2023, the IASB issued an Exposure Draft proposing amendments to IAS 12. The proposed amendments would introduce a temporary, but mandatory, exception to the accounting for deferred taxes arising from the implementation of the Pillar Two rules along with extensive disclosure requirements (see our In brief for more details).

Preparers of financial statements should continue to monitor developments of Pillar Two legislation and assess the potential accounting implications to be recognized and disclosed upon enactment in interim and annual financial statements.