IASB proposes temporary exemption from accounting for deferred tax arising from implementation of Pillar Two model rules

30 November 2022

On 22 November 2022, the International Accounting Standards Board (IASB) proposed amendments to IAS 12 in relation to the implementation of the Pillar Two model rules. The IASB has proposed the introduction of a temporary exception from accounting for deferred taxes arising from the implementation of the rules, accompanied by new disclosure requirements for affected entities. The announcement of the changes was followed by the release of a staff paper with recommendations for amendments to related disclosures.

The IASB expects to publish an exposure draft in January 2023. Subject to comments received, the issuance of final amendments to IAS 12 are expected during the second quarter of 2023.

Temporary exception for deferred tax accounting

The temporary exception would not be applicable to income taxes other than the Pillar Two model rules and would be mandatory. As a consequence, IFRS reporting entities would apply the same accounting treatment resulting in greater comparability between entities, making it easier for investors to understand. The exception would have to be applied immediately once any final changes are made and retroactively in accordance with IAS 8. The exception would apply until the IASB decides to eliminate it or grant it permanent status.

Disclosures

Due to the current lack of information, it seems unlikely that entities are able to disclose meaningful information about the tax consequences of recovering or settling the carried assets and liabilities under the Pillar Two model rules. Therefore, the IASB has decided that affected entities should disclose that they applied the temporary exception, as well as current tax expenses related to Pillar Two top-up taxes.

Staff recommendations

The staff paper includes additional recommendations on disclosure requirements. It is expected that the IASB will subsequently decide on whether qualifying companies should, inter alia, disclose in pre-effective date periods:

Information about legislation enacted—or substantively enacted (the latter, which depends on a jurisdiction’s legislative processes)—to implement the Pillar Two model rules in jurisdictions in which the entity operates; and
Whether the entity (i) operates in jurisdictions it reasonably expects to be low-tax jurisdictions based on the specific requirements of the Pillar Two model rules; or (ii) operates in jurisdictions in which its effective tax rate (calculated based on IAS 12 requirements) is below 15% for the current period.

Relevance for IFRS reporting companies

Several jurisdictions are expected to introduce Pillar Two rules in the first half year of 2023. Although the legislation can have a current tax effect in following years, the enactment may lead to deferred tax accounting implications. Once the amendments to IAS 12 are enacted-or substantively enacted, these should be considered in the interim reporting of companies reporting under IFRS.

Dan Newton
dnewton@bdo.com

Howard Veares
howard.veares@bdo.co.uk

Jan Bijpost
jan.bijpost@bdo.nl

Matt Williams
mtwilliams@bdo.com

Michael Williams
mwilliams@bdo.com

William Connolly
wconnolly@bdo.com