Temporary relief from deferred tax accounting! (Sorry, that’s only from some of it…)

“IASB proposes temporary relief from deferred tax accounting for OECD Pillar Two taxes,” announced a recent release

Here are some extracts:

  • The (IASB) has today proposed amendments to IAS 12 Income Taxes. The proposed amendments aim to provide temporary relief from accounting for deferred taxes arising from the imminent implementation of the Pillar Two model rules published by the Organization for Economic Co-operation and Development (OECD).
  • The IASB is responding to stakeholders’ concerns about the potential implications of these rules for the accounting for income tax in financial statements. In particular, stakeholders were concerned about the uncertainty over the accounting for deferred taxes arising from the rules. They said there was an urgent need for clarity in the light of the imminent implementation of these rules in some jurisdictions.
  • The proposed amendments would introduce:
    • a temporary exception to the accounting for deferred taxes arising from the implementation of the rules; and
    • targeted disclosure requirements for affected companies.
  • … More than 135 countries and jurisdictions representing more than 90% of global GDP have agreed to the Pillar Two model rules. The rules:
    • aim to address the tax challenges arising from the digitalisation of the economy; and
    • provide a template for the implementation of a minimum corporate tax rate of 15% that large multinational companies would pay on income generated in each jurisdiction in which they operate.

On the latter point, the rules apply a system of top-up taxes that results in the total amount of taxes payable on excess profit in each jurisdiction representing at least the minimum rate of 15%; and typically require the ultimate parent entity of the group to pay top-up tax—in the jurisdiction in which it is domiciled—with respect to profits of its subsidiaries that are taxed below 15%. The rules generally apply to multinational groups with revenue in their consolidated financial statements exceeding €750 million in at least two of the four preceding fiscal years, while specifying inclusion thresholds for some jurisdictions and excluding some types of entities from their scope. Some jurisdictions are expected to apply the new rules in the first half of 2023, although they’ll be the exceptions, with the UK and EU possibly targeting 2024. Canada has expressed support for the regime, while developing in parallel a new system of “digital services tax,” to be implemented in 2024 if a new multilateral approach isn’t in place by then.

So it’s no surprise that this raises some accounting challenges. These would include, as set out in the exposure draft:

  • whether the Pillar Two model rules create additional temporary differences—is it possible to link directly the recovery or settlement of the carrying amount of assets and liabilities to future top-up tax payments (or the reduction of these payments)? Whether an entity will pay top-up tax will depend on many factors, including, for example, whether permanent differences arise in the entity’s calculation of income taxes under domestic tax regimes.
  • whether to remeasure deferred taxes—is an entity required to remeasure deferred taxes recognized under domestic tax regimes to reflect potential top-up tax payable under the Pillar Two model rules?
  • which tax rate to use to measure deferred taxes—which tax rate does an entity use to measure any deferred taxes related to top-up tax, considering that…IAS 12 requires an entity to use the tax rates that are expected to apply when the asset is realized or the liability is settled? The tax rate that will apply to an entity’s excess profit in future periods depends on a number of factors that are difficult—if not impossible—to forecast reliably.

And against that backdrop, here’s more detail on the proposed disclosures, in addition to disclosing the current tax expense (income) related to the Pillar Two taxes:

  • information about such legislation enacted or substantively enacted in jurisdictions in which the entity operates:
    • the jurisdictions in which the entity’s average effective tax rate…for the current period is below 15%; the tax expense (income) and accounting profit for these jurisdictions in aggregate, as well as the resulting weighted average effective tax rate.
    • whether assessments the entity has made in preparing to comply with Pillar Two legislation indicate that there are jurisdictions: (i) identified in applying (the above) but in relation to which the entity might not be exposed to paying Pillar Two income taxes; or (ii) not identified in applying (the above) but in relation to which the entity might be exposed to paying Pillar Two income taxes.

Given the regularly swirling questions about the utility of deferred tax accounting even in the best of cases, it’s hard to imagine too many commentators arguing for a full application of IAS 12 in the face of all the above uncertainties. If there are any such commentators though, I will certainly have some admiration for their stubborn integrity. Anyway, the exposure draft is open for comment until March 10, 2023.

The opinions expressed are solely those of the author.

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