Amendments to Income Taxes Standards (IFRS and IFRS for SMEs): International Tax Reform - Pillar Two Model Rules

The OECD published the Pillar Two model rules in December 2021 to address tax challenges arising from the digitalisation of the economy by ensuring that large multinational companies would be subject to a minimum 15% tax rate which will typically be paid by the ultimate parent entity of the group. This is expected to occur when the effective tax rate of the affected jurisdiction is less than 15%. More than 135 countries and jurisdictions representing more than 90% of global GDP have agreed to the Pillar Two model rules.  

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 to IAS 12 introduce:

• A mandatory temporary exception, with no expiry date, to the accounting (recognition and disclosure) 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.
• Separate presentation of the current income tax relating to the OECD Pillar Two; 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 between the enactment (or substantive enactment) of the Pillar Two and their implementation:

Upon the issue of the amendments, companies can benefit from the temporary exception immediately with retrospective application and are required to provide the disclosures to investors for annual reporting periods beginning on or after 1 January 2023. These disclosures are not required in any 2023 interim financial reports.

The IASB tentatively decided to propose amendments like those above for IFRS for SMEs with the following differences making the application slightly easier to implement:

• to clarify that ‘other events’ in the disclosure objective of the standard covers Pillar Two legislation, including in periods when it has been enacted or substantively enacted but is not yet in effect.
• To introduce no new disclosure requirements in these periods.

South Africa is not an OECD country and will not be subject to the Pillar Two model rules. However, a group of companies, with a South African company as the ultimate parent of the group, could contain one or more companies incorporated in an OECD country. These amendments will need to be considered by any company within a group consisting of other OECD countries.

Authors:

Miguel de Sousa, Manager

7 July 2023