Global Minimum Top-up Tax and Deferred Tax

Global top-up tax

In December 2021, the OECD published the Pillar Two model rules to ensure that large multinational companies are taxed at a minimum rate of 15%. More than 135 countries and jurisdictions, representing more than 90% of global GDP, have agreed to the Pillar Two model rules.

As jurisdictions prepared to amend their domestic tax laws to introduce the global minimum top-up tax in line with the GloBE (1) model rules, stakeholders questioned how these changes should be accounted for under IFRS® Accounting Standards.

In particular, they asked whether the top-up tax falls within the scope of TAS 12 / IAS 12 Income Taxes and, if so, how its deferred tax effects should be accounted for.

To address these concerns, the International Accounting Standards Board (IASB) amended IAS 12 in May 2023 as follows:

• a temporary, mandatory exception from deferred tax accounting for the top-up tax has been introduced;
• companies are required to provide new disclosures to compensate for the potential loss of information resulting from the exception.

These amendments provide significant relief in deferred tax accounting and allow companies to focus on assessing the potential current tax effects of the global minimum top-up tax.

Challenges in accounting for the top-up tax

The top-up tax differs from income taxes arising under "traditional" tax regimes. Traditional income taxes are generally based on a company's taxable profit, whereas the top-up tax arises only when a group pays insufficient income tax in a jurisdiction.

This led stakeholders to ask questions such as:

• Is the top-up tax within the scope of IAS 12?

• Do the GloBE model rules create additional temporary differences?

• Do companies need to remeasure existing temporary differences relating to recognised deferred tax?

• What rate will companies use to measure the deferred tax effects of the top-up tax?

As some jurisdictions were expected to enact the GloBE model rules in the first half of 2023, stakeholders urgently sought clarity.

In response, the IASB amended IAS 12 to introduce a temporary, mandatory exception from accounting for deferred taxes arising from legislation implementing the GloBE model rules (2). Under the exception, companies are effectively exempt from recognising and disclosing deferred taxes related to the top-up tax. However, they must disclose that they have applied the exception.

The exception took effect immediately and is applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It will remain in effect until the IASB decides to remove it or make it permanent.

New disclosures

The IASB also introduced new disclosures that companies must provide in their financial statements from 31 December 2023. These disclosures are not required for interim periods ending on or before 31 December 2023.

After the tax law has been enacted but before the top-up tax takes effect

The company is required to disclose known or reasonably estimable information that helps users of financial statements understand its exposure to Pillar Two income taxes at the reporting date.

This information does not need to reflect all the specific requirements of the legislation; companies may provide an indicative range. The disclosures may include quantitative and qualitative information.

• Qualitative information: How the company is affected by Pillar Two taxes and in which jurisdictions — for example, where the top-up tax is triggered and where it will have to be paid.
• Quantitative information: The proportion of profits that may be subject to Pillar Two income taxes and the average effective tax rate applicable to those profits, or how the average effective tax rate would have changed if the Pillar Two legislation had been in effect.

If the information is not known or cannot be reasonably estimated at the reporting date, the company discloses a statement to that effect and information about its progress in assessing its Pillar Two exposure.

Actions management should take

• Continue working with tax specialists, assess the effects and monitor how the GloBE model rules are transposed into the legislation of the relevant jurisdictions.

• Engage with investors to determine the appropriate level of disclosure now and in the future.

• Gather the information needed to make the new disclosures about your potential exposure to Pillar Two taxes.

(1) GloBE – Global Anti-Base Erosion rules.

(2) This includes any qualified domestic minimum top-up tax (QDMTT).