International Tax Reform: Pillar Two Model Rules – Amendments to IAS 12

On 23 May 2022 the IASB published amendments to IAS 12 Income Taxes (the Amendments) providing a mandatory temporary exception, applicable immediately and retrospectively, from deferred tax accounting in relation to Pillar Two top-up taxes. Entities must disclose that they have applied that exception. There are also additional disclosure requirements which are applicable for annual periods beginning on or after 1 January 2023.

Endorsement project

The Amendments are narrow in scope and were issued and exposed for public comment as the IASB considered they merited consultation and outreach.

The IASB’s proposals were set out in Exposure Draft ED/2023/1 International Tax Reform: Pillar Two Model Rules - Amendments to IAS 12 (the ED). The UKEB submitted its final comment letter on 9 March 2023.

The UKEB Secretariat is now preparing its Draft Endorsement Criteria Assessment.

Background

Scope

The Amendments define the scope of the exception as applying to income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules.

Periods when the tax is in effect

Once the tax is in effect, an entity must disclose its current tax in relation to Pillar Two top-up taxes separately.

Periods when the tax is enacted or substantively enacted, but not yet in effect

For periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect, entities would be required to disclose “information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes”.

In meeting that disclosure objective, an entity should disclose known or reasonably estimable quantitative and qualitative information about its exposure at the end of the reporting period. That information, however, need not reflect all the specific requirements of the legislation and could be presented as an indicative range.

Entities which do not have such information about their exposure to Pillar Two taxes must disclose that fact, together with information on progress made in assessing the entity’s exposure.

Transition

Entities are required to apply the mandatory temporary exception immediately and retrospectively and disclose that it has been applied. The targeted disclosure requirements for periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect are effective for annual periods beginning 1 January 2023. They are not required for interim periods ending in 2023.