One key implication of GloBE Pillar 2 is the requirement for financial statement disclosure. More countries are enacting Pillar 2 legislation and businesses that had disclosure requirements in FY23 now must consider disclosure requirements in respect of a greater number of jurisdictions from FY24.
Overview
Where GloBE Pillar 2 legislation has been substantively enacted or is in effect, there is likely to be a requirement to produce both quantitative and qualitative financial statement disclosures in relation to the expected impact.
The disclosures vary depending on which GAAP the financial statements are based upon (US GAAP – none, IFRS – every entity, UK GAAP – may rely on group disclosure).
The qualitative disclosures required are items such as a background to Pillar 2, how this will affect the entity/group both operationally and financially, including any changes already made/planned to be implemented.
The quantitative disclosures required deal with the financial impact of Pillar 2. This can include but is not limited to Effective Tax Rate (“ETR”) calculation (at both group and jurisdiction levels) and disclosure of any top up taxes expected to be due within the entity or jurisdiction it operates.
Groups will need to decide how much information they are going to disclose, relevant to their accounting standard requirements and develop procedures for calculating top-up taxes for relevant enacted legislation in the jurisdictions in which they operate, in order to provide the quantitative disclosures and meet jurisdiction tax reporting obligations.
Any financial statement reporting will need to be approved by the group’s auditors, so relevant supporting evidence will be required.
IFRS vs UK GAAP
With effect for annual reporting periods beginning on or after 1 January 2023 (and any interim reporting periods beginning on or after 1 January 2024), IFRS requires each entity within a multinational enterprise group within the scope of GloBE Pillar 2 to disclose the impact of any legislation that is substantively enacted and/or is currently in effect (subject to certain restrictions). E.g. in the UK, the International Income Inclusion Rule (IIR) and Qualified Domestic Minimum Top Up Tax (QDMTT) were substantively enacted on 20 June 2023 as part of Finance Act (No.2) 2023 to come into effect for accounting periods beginning on or after 31 December 2023. A disclosure should have been made within the relevant financial statements for FY23 in relation to expected exposure in the UK and any subsidiary entities of the UK with actual exposure measured in FY24.
There is currently a mandatory temporary exemption in place within IAS12 which exempts entities from having to disclose the impact of GloBE Pillar 2 legislation on deferred taxes and the recognition and disclosure of such taxes.
UK GAAP rules under FRS101/102 have a similar, but slightly different approach to the disclosures required for accounting periods beginning on or after 1 January 2023. There is a disclosure exemption under UK GAAP for subsidiary entities where equivalent satisfactory disclosures are made in the consolidated financial statements in which an entity is included. Qualitatively, if the consolidated accounts name the jurisdictions which have substantively enacted Pillar 2 top-up tax legislation, then it can be easier to apply this exemption. Though not mandatory, it is recommended that any entities that are applying this exemption disclose so within their entity-level financial statements.
IIR & QDMTT
Disclosure – from FY23 and later periods
In effect – from FY24 and later periods
Under IIR the Ultimate Parent Entity (UPE) of the group applies the IIR where it has an ownership interest in a low-taxed entity at any time during the year. The UPE is usually responsible for the collection and paying of any top-up taxes though in certain jurisdictions (including the UK) it can nominate another entity within the group to do this on its behalf. As the parent entity is applying the IIR, ordinarily the group and the entities within should only have to concentrate on the position of the jurisdiction in which they operate and any top-up taxes attributable to them.
QDMTT implements a top-up tax in each jurisdiction which has enacted QDMTT legislation. Under some jurisdiction’s implementation (including the UK) a group can elect that a single entity will pay the QDMTT for the group entities in that jurisdiction. The effect of this will need to be disclosed in the elected payer’s accounts and the consolidated accounts but the impact will be nil on other entities in that jurisdiction unless there is a voluntary intra-group recharge. IIR & QDMTT became effective in the UK for tax purposes for accounting periods beginning on or after 31 December 2023. Groups should understand the legislative position of each of the jurisdictions in which they operate to comply with the disclosure requirements of the relevant accounting standards.
IIR & QDMTT case study
The group applied for mandatory exemption for deferred tax
The group analysed the position and considered that:
“The UK, Ireland & Sweden have (substantively) enacted IIR & QDMTT legislation. The group has analysed the position and expects there to be no financial impact.”
“The UK, Ireland & Sweden have (substantively) enacted IIR & QDMTT legislation. The group has analysed the position and expects there to be a 1.5% increase in the ETR in Ireland as a result of top-up tax (QDMTT)”
Under taxed profits rule (UTPR)
Disclosure – from FY24 and later periods
In effect – from FY25 and later periods
UTPR is a backstop to the IIR. It deals with top-up taxes where IIR either hasn’t been implemented further up the group structure or it has not collected any top-up taxes. Under the UTPR the allocation of the taxing rights takes place within the jurisdictions that have implemented UTPR, not the jurisdiction of the ultimate parent entity.
UTPR is a much more complex calculation as it has to consider the worldwide position of the group and the effect this has on each jurisdiction, to decipher who collects and reports any top-up taxes, especially when the UPE jurisdiction does not have any GloBE Pillar 2 legislation in place or when a UPE is not an entity caught within the legislation.
The UK’s implementation of UTPR has not yet taken place and at the date of writing, it is not substantively enacted and consequently is not in effect for tax or accounting purposes. It is expected that UTPR will not come into effect before accounting periods beginning on or after 31 December 2024. It is, however, anticipated that in the UK this will be substantively enacted within 2024. For UK GAAP the impact of UTPR on entities will then need to be considered in any accounting period that ends after the date of substantive enactment.
There are provisions in the UK and other jurisdictions that draft legislation that will allow the filing member of a group to elect that a specific group member be allocated the whole of the tax attributable to the UK members. This would need to be considered for the disclosures that each entity within the scope of the rules will make.
It is key that groups understand the legislative position of each jurisdiction in which they operate in order to understand who will be subject to, report and required to pay any top-up taxes arising under the UTPR.
UTPR case study
If UPE is in a UTPR jurisdiction then the disclosure will likely follow IIR & QDMTT disclosures in previous periods.
If UPE is not in a UTPR jurisdiction then a global calculation is needed, and consideration is needed as to who will report and be liable to top-up taxes for each jurisdictional level. This will influence the disclosure in the group and potentially entity financial statements.
“The UK, Ireland & Sweden have (substantively) enacted UTPR legislation. The group has analysed the position and expects there to be a 1.5% increase in the ETR in Ireland as a result of top-up tax (QDMTT). In respect of the worldwide top-up tax position under UTPR, the group has identified that there will be top-up tax in relation to operations in Djibouti. The top-up tax in relation to Djibouti will be split between the UK, Ireland & Sweden in the ratio 4:3:1 and is expected to be in the region of $10m per annum.”
Disclosure of top-up taxes
Top-up taxes arising on any particular entity should be displayed in a separate line within the current tax note along with other current taxes.
The bottom line
In summary, there are many considerations concerning the disclosures required in an entity’s financial statements, the key ones being;
in which jurisdictions do entities operate;
what reporting standard an entity is using and what are its requirements in relation to GloBE Pillar 2;
what GloBE Pillar 2 legislation is substantively enacted or in effect in each jurisdiction;
the calculations and audit evidence needed in order to satisfy a group’s/entity’s obligations under both financial reporting standards and in relation to GloBE Pillar 2 top-up taxes.
Get in touch
For more information on how we can help you with your GloBE Pillar 2 disclosures and other matters please contact one of the team.
