Pillar Two disclosures in 30 June 2024 financial statements

The Organization for Economic Cooperation and Development (OECD)’s Pillar Two ‘top-up’ income tax regime is upon us as more and more countries start implementing legislation to impose the global minimum tax and a domestic minimum tax, both at a tax rate of 15 per cent, for entities part of a group with consolidated revenue exceeding €750 million.

As of 30 June 2024, 32 countries had enacted Pillar Two legislation.

Effect of Pillar Two income taxes on income taxes and deferred taxes

IAS 12 Income Taxes requires an entity to calculate its current tax liability using the tax rates (and tax laws) enacted or substantively enacted by the end of the reporting period. Therefore, Pillar Two ‘top-up’ taxes are only factored into the current tax liability calculation if the relevant country has enacted or substantively enacted laws to levy the Pillar Two income taxes before the reporting date.

Deferred tax assets and liabilities are determined using the tax rates expected to apply when the asset is realised, or the liability is settled. Calculations are similarly based on tax rates (and tax laws) enacted or substantively enacted by the end of the reporting period. Determining the appropriate tax rate is usually straightforward when tax is only payable in one jurisdiction. However, working out the future ‘top-up’ tax rate for entities subject to Pillar Two ‘top-up’ taxes would be complicated and may even be impossible to determine.

Amendments to IAS 12

Therefore, changes were made to IAS 12,  clarifying how entities subject to the OECD’s Pillar Two ‘top-up’ income taxes will account for their deferred taxes. The equivalent amendments were made to AASB 112 Income Taxes, contained in AASB 2023-2 in Australia.

The amendments include that:

1. Entities will not be permitted to recognise or disclose information about deferred tax assets and deferred tax liabilities related to Pillar Two income taxes (this is a mandatory exception). Entities must then disclose that they have applied the mandatory exception.
2. Entities must disclose the amount of current income tax expense/income related to Pillar Two income taxes separately.
3. In periods when the Pillar Two income tax legislation is enacted or substantively enacted, but not yet in effect, entities must disclose known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes arising from that legislation.

30 June 2024 financial statements will be impacted differently, depending on the status of Pillar Two legislation in countries where a large multinational group operates.

Status of Pillar Two legislation

For interim and annual reporting periods ending 31 December 2023, we noted that 26 countries had enacted or substantively enacted Pillar Two legislation. During the six months ended 30 June 2024, another six countries had done so. These are Canada, Estonia, Greece, Lithuania, Malta and Norway.

The 32 countries that have now enacted or substantively enacted Pillar Two legislation are listed below:

Austria	Germany	Norway
Belgium	Greece	Romania
Bermuda	Hungary	Slovakia
Bulgaria	Ireland	Slovenia
Canada	Italy	South Korea
Croatia	Japan	Sweden
Czech Republic	Liechtenstein	Switzerland
Denmark	Lithuania	The Netherlands
Estonia	Luxembourg	United Kingdom
Finland	Malaysia	Vietnam
France	Malta

Pillar Two legislation is effective in all these countries for years beginning on or after 1 January 2024, except for Estonia, Lithuania and Malta, where relevant laws will only be operational from 2030.

Australia

We note that Pillar Two legislation is not enacted or substantively enacted in Australia as of 30 June 2024. While the Australian Government committed to introducing Pillar Two legislation in the May 2023 Federal Budget, a series of Bills to implement the Pillar Two taxes was only introduced into the House of Representatives on 4 July 2024, and at the time of writing are still subject to debate.

Mandatory exception

As the mandatory exception applies immediately from the date the amendments to AASB 112 were issued in Australia, i.e. 27 June 2023, entities will not recognise or disclose information about deferred tax assets and deferred tax liabilities related to Pillar Two income taxes.

Where Pillar Two legislation has yet to be enacted in any jurisdiction where the group operates, there will be no impact on the 30 June 2024 interim and annual financial statements because the mandatory exception is irrelevant.

However, suppose the group operates in any of the 32 named countries whose Pillar Two legislation was enacted before 30 June 2024. In that case, the mandatory exception must be applied in the 30 June 2024 interim and annual financial statements, and this fact must be disclosed.

Mandatory disclosures in 30 June 2024 financial statements

At 30 June 2024, if the legislation has not been enacted or substantively enacted in any jurisdiction where the group operates, the additional disclosures noted in (b) and (c) above are not required in either the 30 June 2024 interim or annual financial statements.

Where Pillar Two legislation has been effective during the reporting period in any jurisdiction where the group operates, the additional disclosures in (b) above are required regarding the portion of Pillar Two income taxes included in the current income tax expense for the period. This disclosure is, therefore:

• Not required in the 30 June 2024 annual financial statements because Pillar Two legislation was not effective in any jurisdiction during the reporting period, which commenced on 1 July 2023
• Required in 30 June 2024 interim financial statements where the entity operates in any of the jurisdictions noted above (other than Estonia, Lithuania and Malta, where laws are not fully operational until 2030).

The additional disclosure in (c) applies where Pillar Two legislation has been enacted or substantively enacted by 30 June 2024, but is not yet effective. This would apply to the annual financial statements of all 32 countries. Our previous article contains an example of what these disclosures might look like.

Recommended disclosures for 30 June 2024

In addition to the 32 countries noted above, many others, like Australia, have committed to a Pillar Two income tax regime, releasing consultation documents and draft legislation, which was not enacted or substantively enacted by 30 June 2024. Despite none of the disclosures being mandatory for these entities, we nevertheless recommend that Australian entities who may be subject to the Pillar Two rules consider disclosing information regarding the potential for tax effects of the Pillar Two rules in future.

Example wording for 30 June 2024 interim and annual financial statements is shown below for instances where no jurisdictions in a group have passed Pillar Two legislation at 30 June 2024.

The above wording should be tailored where some of the Group’s operations are in jurisdictions that have passed Pillar Two legislation at 30 June 2024. In such cases, the mandatory disclosures noted in (c) above will apply. Please reach out to our IFRS & Corporate Reporting team if you need help with this.

More information

Please refer to our website to access the most up-to-date information about the status of Pillar Two implementation around the world.

Need help?

Please contact our Corporate & International Tax team if you require assistance implementing the Pillar Two rules, or our IFRS & Corporate Reporting team for the financial reporting implications of the new rules, including appropriate disclosures.