Accounting Alert

The International Accounting Standards Board (IASB) has issued amendments to IAS 12, Income taxes, to give entities temporary relief from accounting for deferred taxes arising from the Organization for Economic Co-operation and Development’s (OECD) international tax reform. The amendments introduce both a temporary exception and some targeted disclosure requirements.

Background

The OECD published its Pillar Two Model Rules in December 2021 to ensure that large multinational companies (i.e., groups with revenue of EUR750 million or more in two of the last four years) would be subject to a minimum 15% tax rate. The reform is expected to apply in most jurisdictions for accounting periods starting on or after 1 January 2024.

However, while the reaction from jurisdictions around the world to implement the changes has been positive, there have been major stakeholder concerns about the uncertainty over the accounting for deferred taxes arising from the implementation of these rules. Those concerns mainly refer to identifying and measuring deferred taxes because determining whether the Pillar Two Rules will create additional temporary differences is very difficult and also which tax rate will be applicable (considering the number of factors affecting its determination). Therefore, the IASB has acted quickly to address these concerns and provide direction on what they expect entities to disclose.

The Amendments

Provide a temporary recognition exception to accounting for deferred taxes arising from the implementation of the international tax reform (Pillar Two Model Rules). The aim of this exception is to provide some consistency in applying IAS 12 when preparing financial statements as the rules are phased in.

Additional disclosure requirements – these are targeted at a reporting entity’s exposure to income taxes arising from the OECD reforms in periods in which the Pillar Two Model legislation is enacted or substantively enacted but not yet in effect. The aim of these disclosures is to help investors with their understanding of the reporting entity’s exposure to these tax reforms, particularly before any domestic offshore legislation takes effect. The amendments provide guidance on how this information could be disclosed to meet the above objective.

Entities are able to benefit from the temporary exception immediately as soon as the amendments are published but in providing this exemption, they are required to provide the disclosures to investors for annual reporting periods beginning on or after 1 January 2023.  However, in some jurisdictions, such as Europe, the endorsement process will probably not be completed before 30 June 2023 resulting in reporting entities operating in jurisdictions where the Pillar Two Rules have been enacted or quasi enacted, being in a situation that the amendments are aiming to avoid.

Please refer to the attached file for further details.