Understanding the impact of Pillar Two taxes on 31 December 2024 financial statements

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.

Australian entities that are part of an MNE group must, therefore, consider the impact of these new rules on the measurement of current tax liabilities in the annual and interim financial statements for periods ending on or after 31 December 2024.

What are the GDMT laws?

The GDMT laws introduce a new tax system that is separate from the Income Tax Assessment Act 1997. The new legislation introduces:

• The income inclusion rule (IIR), a top-up tax payable by Australian parent entities of MNE groups where any of their subsidiaries have an effective tax rate of less than 15% (this only applies if there are no foreign parent entities of the Australian parent which have a substantively enacted IIR), and
• The qualifying domestic minimum top-up tax (QDMTT), a top-up tax where an Australian member of an MNE group has an effective tax rate of less than 15%.

In addition, the undertaxed profits rule (UTPR) will be applicable to financial years beginning on or after 1 January 2025. The UTPR acts as a backstop rule that allows Australia to apply a top-up tax on Australian entities if the group has a parent entity in a jurisdiction that has not enacted IIR and the group's effective tax rate in another jurisdiction is below 15%, and that jurisdiction has not enacted QDMTT.

Which entities will recognise QDMTT liabilities?

With QDMTT legislation enacted and in force in Australia prior to 31 December 2024, entities must assess whether QDMTT liabilities will be triggered in any Australian group entities for annual and interim periods ending on or after 31 December 2024.

Entities must also assess whether QDMTT liabilities could be triggered for any foreign subsidiaries of Australian groups. This could occur if the foreign subsidiaries are tax residents of a foreign jurisdiction that has also enacted or substantively enacted a QDMTT by 31 December 2024.

Which countries have enacted or substantively enacted a QDMTT as at 31 December 2024?

In addition to Australia, the following are some countries that had enacted or substantively enacted a QDMTT as at 31 December 2024, effective from 1 January 2024.

Austria	Greece	Romania
Barbados	Hungary	Slovakia
Belgium	Ireland	Slovenia
Bulgaria	Italy	South Africa
Canada	Latvia	Spain
Croatia	Liechtenstein	Sweden
Denmark	Lithuania	Switzerland
Finland	Luxembourg	The Netherlands
France	Malta	Turkey
Germany	Norway	United Kingdom
Gibraltar	Portugal	Vietnam

Which entities will recognise IIR liabilities?

As with the QDMTT, the IIR legislation has also been enacted and is effective in Australia from 1 January 2024. Australian parent entities must, therefore, assess whether they have a tax liability as at 31 December 2024 based on the IIR.

Which countries have enacted or substantively enacted an IIR at 31 December 2024?

In addition to Australia, the following are some countries that had enacted or substantively enacted an IIR as at 31 December 2024, effective from 1 January 2024.

Austria	Germany	Romania
Belgium	Greece	Slovenia
Bulgaria	Hungary	South Africa
Canada	Ireland	South Korea
Croatia	Italy	Spain
Cyprus	Japan	Sweden
Czech Republic	Liechtenstein	The Netherlands
Denmark	Luxembourg	Turkey
Finland	Norway	United Kingdom
France	Portugal	Vietnam

Effect of Pillar Two income taxes on deferred taxes

Deferred tax assets and liabilities are determined using the tax rates expected to apply when the asset is expected to be realised, or the liability is expected to be settled. Similar to current income taxes, calculations are 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

To overcome these challenges, changes were made to IAS 12, providing a mandatory temporary exception so that entities are not permitted to account for or disclose information regarding deferred taxes arising from any top-up tax required under the Pillar Two rules. Without this change, entities paying top-up tax would have difficulty determining the tax rate expected to apply to taxable or deductible temporary differences when they are realised or settled in future.

Disclosures required in 31 December 2024 financial statements

IAS 12, paragraphs 88A to 88D, introduce new disclosures for Pillar Two income taxes. For periods ending on or after 31 December 2024, Australian entities will need to disclose the following:

• The amount of the current income tax expense (income) relating to Pillar Two income taxes (paragraph 88B)
• That the entity has applied the mandatory exception for recognising and disclosing information about deferred taxes related to Pillar Two income taxes (paragraph 88A)
• In periods when the Pillar Two income tax legislation is enacted or substantively enacted, but not yet in effect (this applies to the UTPR in Australia), 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 (paragraph 88C-88D).

Different countries are at varying stages of their Pillar Two journey. While rules for IIR and QDMTT are already enacted and in force in many jurisdictions, in some cases, the rules only become effective in future periods. It is, therefore, important that the notes to the financial statements explain and, where possible, quantify the effect on the financial statements of future periods.

An example of this is where an Australian group has a foreign parent entity that has enacted or substantively enacted legislation for the IIR, which is not yet in effect. The Australian parent entity is currently ‘picking up the tab’ for the group’s IIR liability, but in future, the IIR liability will be recognised by the foreign parent. The notes to the 31 December 2024 should explain and quantify this effect. Our previous article contains an example of what these disclosures might look like.

Recommended disclosures for 31 December 2024

In addition to the countries noted above, which have already legislated the QDMTT and the IIR, many others have committed to a Pillar Two income tax regime, releasing consultation documents and draft legislation, which was not enacted or substantively enacted by 31 December 2024. Despite none of the disclosures being mandatory for these entities, we nevertheless recommend that financial statements of individual foreign subsidiaries that are in the process of adopting Pillar Two top-up taxes include explanations of the impacts in future financial years.

More information

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

Need help?

The rules for measuring QDMTT and IIR tax liabilities are extremely complex. Please contact our Corporate & International Tax team if you require assistance, or our IFRS & Corporate Reporting team for the financial reporting implications of the new rules, including appropriate disclosures.