On 23 May 2023, The International Accounting Standards Board (IASB) issued amendments to IAS 12 Income Taxes. The amendments give companies temporary relief from accounting for deferred taxes arising from the Organisation for Economic Co-operation and Development’s (OECD) international tax reform.
In December 2021, the Organisation for Economic Co-operation and Development
(OECD) published Tax Challenges Arising from the Digitalisation of the Economy –
Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS,
hereafter referred to as the ‘Pillar Two model rules’. These rules:
- are part of a two-pillar solution to address the tax challenges arising from the digitalisation of the economy and were agreed by more than 135 countries and jurisdictions representing more than 90% of global GDP; and
- provide a template that jurisdictions can translate into domestic tax law and implement as part of an agreed common approach.
The Pillar Two model rules:
- aim to ensure that large multinational groups pay a minimum amount of tax on income arising in each jurisdiction in which they operate;
- would achieve that aim by applying a system of top-up taxes that results in the total amount of taxes payable on excess profit in each jurisdiction representing at least the minimum rate of 15%; and
- typically require the ultimate parent entity of the group to pay top-up tax—in the jurisdiction in which it is domiciled—with respect to profits of its subsidiaries that are taxed below 15%
The rules generally apply to multinational groups with revenue in their consolidated financial statements exceeding €750 million in at least two of the four preceding fiscal years. The rules specify inclusion thresholds for some jurisdictions and exclude some types of entities from their scope. The reform is expected to apply in most jurisdictions for accounting periods starting on or after 1 January 2024.
Stakeholders informed the IASB of concerns about the implications for income tax accounting resulting from jurisdictions implementing the Pillar Two model rules within a short period of time. Those concerns related to:
- how to account for top-up tax
- the usefulness of the information that could result from accounting for deferred taxes related to top-up; and
- the urgent need for clarity in the light of the imminent enactment of tax law to implement the rules in some jurisdictions.
The IASB has taken urgent action to respond to stakeholders’ concerns about the uncertainty over the accounting for deferred taxes arising from the implementation of the rules.
The amendments will introduce:
- a temporary exception—to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules. This will help to ensure consistency in the financial statements while easing into the implementation of the rules; and
- targeted disclosure requirements—to help investors better understand a company’s exposure to income taxes arising from the reform, particularly before legislation implementing the rules is in effect.
Companies can benefit from the temporary exception immediately but are required to provide the disclosures to investors for annual reporting periods beginning on or after 1 January 2023.
A future maintenance project has been added to the pipeline in which the IASB will revisit the temporary exception and related disclosures.
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