Temporary exception from deferred tax accounting for GloBE

Understanding BEPS Pillar Two

Temporary exception from deferred tax accounting for GloBE

12 October 2023 | 6 minute read

Senthilnathan Sampath - Partner, Corporate Reporting Services, PwC Singapore
Angeline Tan - Senior Manager, Corporate Reporting Services, PwC Singapore

Insights

Understand the mandatory exception from deferred taxes recognition and disclosure

The Pillar Two rules (also known as Global Anti-Base Erosion rules (GloBE rules)) apply to multinational enterprises (MNEs) that have consolidated revenues of EUR 750 million or more, in accordance with the group consolidated financial statements, in at least two out of the last four years.

On 23 May 2023, the International Accounting Standards Board (IASB) issued narrow-scope amendments to IAS 12 which seek to address stakeholders’ concerns arising from the GloBE rules. The amendments provide for a mandatory 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 Organisation for Economic Co-operation and Development (OECD), including tax law that implements qualified domestic minimum top-up taxes (DTT) described in those rules.

Issues the IASB amendments seek to address

When the GloBE rules were released in December 2021, it was unclear how an entity would account for deferred taxes related to top-up tax. Stakeholders have brought a number of concerns to the IASB:

Do the rules create additional temporary differences?
Should an entity remeasure deferred taxes recognised under domestic tax regimes to reflect potential top-up tax payable under the rules?
Which tax rate should an entity use to measure deferred taxes related to top-up tax, considering that paragraph 47 of International Accounting Standard 12 (IAS 12), ‘Income Taxes’ requires an entity to use the tax rates expected to apply in future periods. The tax rates that will apply in these periods depend on several factors that are difficult, if not impossible, to forecast reliably.

Targeted disclosure requirements

The exception from deferred tax recognition and disclosure as issued by the IASB on 23 May 2023 and as endorsed by the Accounting and Corporate Regulatory Authority of Singapore on the same day also introduces targeted disclosure requirements for affected companies.

What are the disclosures required

The fact that they have applied the exception to recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes
Their current tax expense (if any) related to the Pillar Two income taxes
During the period between the legislation being enacted or substantially enacted and the legislation becoming effective, entities will be required to disclose known or reasonably estimable information that would help users of financial statements to understand an entity’s exposure to Pillar Two income taxes arising from that legislation. If this information is not known or reasonably estimable, entities are instead required to disclose a statement to that effect and information about their progress in assessing the exposure.

To meet the targeted disclosure requirements’ objective on the known or reasonably estimable exposure to Pillar Two income taxes, an entity shall disclose:

information that is both quantitative and qualitative in nature;
information based on an entity’s circumstances at the end of the reporting period; and
information can be in the form of indicative range.

An illustrative disclosure can be found in this publication (Note 6(g)), a PwC's illustrative consolidated financial statements for a fictitious listed company.

When is the amendment effective

The exception from deferred tax recognition and disclosure is effective immediately upon the issuance of the amendments and retrospectively in accordance with International Accounting Standard 8 (IAS 8)/Singapore Financial Reporting Standards (International) 1-8 (SFRS(I) 1-8)/Singapore Financial Reporting Standards 8 (SFRS 8), ‘Accounting Policies, Changes in Accounting Estimates and Errors’, 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 OECD’s Pillar Two model 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.

Summary

The amendments to IAS 12 provide welcome relief to preparers of financial statements. Nonetheless, the complexity of Pillar Two rules means that the targeted requirements to provide estimable exposure disclosures for deferred taxes would still be challenging for in-scope MNEs. Tax and finance leaders should take advantage of the temporary relief afforded by the amendments to IAS 12 and proactively initiate strategic discussions to:

Identify current financial position
Anticipate potential risks and exposures
Navigate the rapidly-changing landscape of tax and financial reporting obligations