Project Initiation Plan - International Tax Reform - Pillar Two Model Rules (Proposed amendments to IAS 12)

Purpose

A1. This paper sets out the plan to influence and to assess whether to adopt[^1] the narrow-scope Amendments International Tax Reform – Pillar Two Model Rules[^2] to IAS 12 Income Taxes (the Amendments), currently issued by the IASB as an Exposure Draft (ED).

A2. The UKEB's statutory functions mean that it must consider the Amendments against the statutory adoption criteria before their formal adoption for use in the UK. UK entities cannot use the Amendments until formal adoption has taken place.

A3. The Organisation for Economic Co-Operation and Development (OECD) Pillar Two model rules propose a worldwide 15% tax rate, which the UK is likely to enact by summer 2023. Stakeholders have expressed concerns that it is not clear how IAS 12 applies to Pillar Two taxes and that accounting for deferred tax arising from the Pillar Two model rules would not be practicable and could lead to diversity in practice. Given the urgency of the Amendments and the IASB's accelerated timetable, this PIP addresses both the influencing and the endorsement and adoption stages of the project together.

Background

A4. In December 2021, the OECD finalised the model rules for Pillar Two, one of the two Pillars designed to address the tax challenges presented by the globalisation and digitalisation of the economy.

A5. The Pillar Two model rules introduce a minimum tax rate for multinational groups and entities with turnover of €750m or above. In jurisdictions where a group's effective tax rate is below 15%, the Pillar Two model rules require the entity to increase the tax it pays to that rate, by applying a top-up tax.

A6. Stakeholders have expressed concerns to the IASB around whether tax arising under the model rules is in all circumstances an income tax within the scope of IAS 12, and around the uncertainty over how to account for deferred tax arising from the top-up tax. Questions raised include:

• which tax rate to use to measure deferred taxes;
• whether additional temporary differences arise from the Pillar Two model rules, i.e. is it possible to link the recovery or settlement of the carrying amount of assets or liabilities directly to future top-up tax payments; and
• whether domestic temporary differences should be remeasured.

A7. Some stakeholders have also commented that accounting for deferred tax arising from Pillar Two top-up tax could be extremely complex and that the costs of doing so might therefore outweigh the benefits to users.

A8. Stakeholders have further observed that this matter is urgent, as some jurisdictions are already in the process of enacting or substantively enacting Pillar Two legislation and others, including the UK, are expected to do so by summer 2023.

A9. In response, the IASB published the ED proposing to amend IAS 12 on 9 January 2023. The ED seeks to provide relief for affected entities and avoid inconsistent application of IAS 12.

Description of the Amendments to IAS 12

A10. The proposed Amendments to IAS 12 are described briefly in the table below.