Amendments to IAS 12: Temporary Relief for Accounting Deferred Taxes under OECD Pillar Two Rules

Posted by Written by Naina Bhardwaj Reading Time: 9 minutes

To address stakeholder concerns about the accounting treatment of deferred taxes arising from the implementation of the OECD’s Pillar Two rules, the International Accounting Standards Board (IASB) has made amendments to IAS 12 (Income Taxes). These amendments offer relief to multinational enterprises (MNEs) by providing a temporary exception from reporting deferred taxes in financial statements. Companies can immediately benefit from this exception. Additionally, specific disclosures to investors are required for annual reporting periods starting on or after January 1, 2023. The main goal of these amendments is to reduce uncertainties, improve transparency, and ensure consistent financial reporting during the transitional period of implementing Pillar Two rules.

For a better understanding of the implications of the amendments to IAS 12 and to ensure that your company’s accounting practices align with the latest developments, feel free to reach out to our experts at

On May 23, 2023, the International Accounting Standards Board (IASB) introduced amendments to IAS 12 (Income taxes). These amendments provide multinational enterprises (MNEs) with temporary relief from reporting deferred taxes in financial statements.

The reporting requirements for deferred taxes arise from the implementation of the Global Anti-Base Erosion (GloBE) model rules (also referred to as Pillar Two rules), which are a part of Pillar Two of the OECD’s Base Erosion and Profit Shifting (BEPS) project. The GloBE model rules are designed to ensure that MNEs pay a minimum level of tax on their global profits, regardless of where they are located. The IASB’s amendments to IAS 12 are intended to provide MNEs with temporary relief from the complexity and cost of complying with the GloBE model rules. 

The OECD estimates that BEPS practices result in annual revenue losses of approximately US$100 billion to US$240 billion for countries, which accounts for around four to 10 percent of global corporate income tax revenue.

Krishan Aggarwal, Senior Manager, International Business Advisory at Dezan Shira & Associates, notes:

The international tax reform is a welcome advancement that responds to stakeholder input and offers temporary relief for companies from deferred tax accounting. This relief allows companies to thoroughly evaluate the potential tax implications of the global minimum top-up tax. Consequently, the reform alleviates the administrative burden on businesses, granting them the opportunity to focus more effectively on implementing the OECD’s rules.

Although the recent relief on the minimum top-up tax has brought a sense of relief to entities, it is important to note that this does not imply complete disregard of the tax for financial reporting purposes. Entities still need to establish an accounting policy for Pillar Two Income Taxes. Additionally, starting December 31, 2023, entities are required to disclose their group’s exposure to the top-up tax. These measures promote transparency in financial reporting and the maintenance of precise records across all entities.

Overall, this reform is a positive development that promotes efficiency and compliance for companies. Entities need to carefully consider the potential impact of the top-up tax on their operations. In order to be well prepared, entities must furnish new disclosures that specifically highlight their exposure to the top-up tax. Moreover, it is crucial for entities to closely monitor the implementation of any new tax laws in all jurisdictions where they operate.

What is IAS 12?

IAS 12 refers to International Accounting Standard 12, which is an accounting standard issued by the IASB. It is titled “Income Taxes” and provides guidelines for the recognition, measurement, and presentation of income tax-related matters in financial statements. Its objective is to provide a framework for recognizing and measuring the current and future tax implications related to the recovery or settlement of assets and liabilities, as well as transactions and events recorded in an entity’s financial statements.

IAS 12 mandates the recognition of a deferred tax liability or deferred tax asset, with limited exceptions, when an entity foresees that the recovery or settlement of an asset or liability will lead to higher or lower future tax payments than if no tax consequences were involved. The amount of deferred tax liability or asset is measured as the difference between the carrying amount of the asset or liability and its tax base, multiplied by the applicable tax rate. The tax rate used is the rate that is expected to apply when the asset or liability is recovered or settled.

What are the latest amendments to IAS 12 with respect to deferred tax accounting?

  • Temporary exception from deferred tax accounting: A temporary recognition exception is provided for accounting for deferred taxes resulting from the implementation of the international tax reform (Pillar Two Model Rules). The objective of this exception is to ensure that there is some consistency in the application of IAS 12 when financial statements are prepared during the phased implementation of the rules. Entities are obligated to disclose their utilization of this exception.
  • Additional disclosure requirements: Specific disclosure requirements have been introduced to address a reporting entity’s exposure to income taxes resulting from the OECD reforms during periods when the Pillar Two Model legislation is enacted or substantively enacted but not yet effective. These targeted disclosures aim to assist investors in comprehending the reporting entity’s exposure to these tax reforms, particularly prior to the implementation of any domestic offshore legislation. The amendments offer guidance on the appropriate disclosure methods to fulfill the aforementioned objective.

Companies can benefit from the temporary exception immediately but are required to provide the disclosures to investors for annual reporting periods beginning on or after January 1, 2023.

What are the various disclosure requirements under Pillar Two rules?

The purpose of the disclosures mandated under Pillar Two is to provide clarity to users of financial statements regarding the effects of these rules on an entity’s financial performance and position. These disclosures aim to assist financial statement users in evaluating the entity’s vulnerability to the Pillar Two top-up tax and the potential ramifications of these rules on its future financial performance.

Specific disclosures for periods before the rules are in effect

  1. Information about legislation enacted to implement the Pillar Two model rules: Entities are required to provide information about the legislation enacted to implement the Pillar Two model rules in the jurisdictions where they operate. This information should include the date of enactment, the key provisions of the legislation, and the expected date of implementation.
  2. Jurisdictions with effective tax rates below 15 percent: Entities must disclose the jurisdictions where their effective tax rate, calculated in accordance with IAS 12 requirements, falls below 15 percent. Additionally, they should include the accounting profit before tax, income tax expense, and the resulting weighted-average effective tax rate for these jurisdictions in aggregate.
  3. Discrepancies or differences: Entities must disclose any discrepancies or differences indicated by the entity’s preparatory work for compliance with the Pillar Two model rules compared to the information provided in (a) and (b). This information could include any differences in the expected timing of implementation, the scope of the rules, or the amount of the top-up tax.

Ongoing disclosures

Current tax expense related to the Pillar Two top-up tax: Once the Pillar Two rules are in effect, entities must disclose the current tax expense related to the Pillar Two top-up tax. This information should be disclosed separately from other income tax expenses.

Understanding OECD Pillar Two: Components, mechanisms, and calculation of top-up tax

The OECD/G20 Inclusive Framework Tax Deal proposes two main elements: Pillar One, which calls for the redistribution of profits generated by the largest companies to the domicile markets where they actually make their sales instead of simply where they are headquartered, and Pillar Two, which establishes a global minimum effective tax rate of 15 percent determined on a country-by-country basis. 

In December 2021, the OECD published its Pillar Two model rules to provide a template for the implementation of a minimum corporate tax rate of 15 percent that large MNEs would pay on income generated in each jurisdiction in which they operate. The tax will be applicable on MNEs with revenue exceeding EUR 750 million (US$808.38 million). It is estimated that this measure will generate approximately US$150 billion in additional global tax revenues annually.

What are the components of OECD Pillar Two?

Pillar Two (GloBE)) consists of the following:

Two domestic rules

  • An income inclusion rule (IIR) that will impose tax on the income of a foreign-controlled entity (or foreign branch) if that income benefits from an effective tax rate below a certain minimum rate.
  • An under-taxed payments rule (UTPR) that will either deny a deduction or potentially impose a withholding tax (WHT) on base eroding payments – unless that payment is taxed at or above a specified minimum rate in the recipient’s jurisdiction.

A treaty-based rule

The subject to tax rule (STTR) will ensure that treaty benefits for certain related party payments, such as interest and royalty payments, are granted to MNEs only if an item of income is taxed at a minimum rate in the recipient jurisdiction.

Pillar Two

What are Pillar Two/GloBE rules?

The Pillar Two/GLoBE model rules offer a comprehensive framework for implementing the two-pillar solution to address the tax challenges posed by the digitalization and globalization of the economy. These rules were agreed upon in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS.

The rules establish the scope and outline the mechanism for the GloBE rules under Pillar Two. They lay out a structure that identifies which multinational companies are subject to the minimum tax. They also establish a way to calculate how much tax an MNE should pay in each jurisdiction and determine the extra tax amount owed under the rules. Finally, these rules specify the order in which the top-up tax is imposed on a particular member of the multinational group.

Overview of the key operating provisions of the GloBE rules

Top-up tax mechanism

Under the GloBE Rules, a “top-up tax” is implemented and calculated at the jurisdictional level. These rules utilize a standardized base and a defined set of covered taxes to determine the jurisdictions where a MNE faces an effective tax rate below 15 percent. In such cases, the rules impose a coordinated tax charge to ensure that the MNE’s effective tax rate on that income is raised to meet the minimum rate. It’s important to note that a substance-based carve-out is taken into consideration. The design of the GloBE Rules as a top-up tax enables the seamless and coordinated application of these rules across jurisdictions.

Determining top-up tax liability for MNEs: Step-by-step process

Step 1 – Constituent entities within scope

Identify groups within scope and the location of each constituent entity within the group.

MNE groups are in scope of the GloBE rules if their consolidated revenue exceeds EUR 750 million. The constituent entities of an MNE group include all the entities within the group, with any permanent establishment of a group entity being treated as a separate constituent entity. Excluded entities are, however, not within scope and are excluded from the operation of the GloBE rules. The location of each constituent entity is determined based on its local tax treatment.

Step 2 – GloBE Income

Determine the income of each constituent entity.

  • Determination of financial accounting net income: The initial step is to consider the net income or loss used for preparing the consolidated financial statements of the ultimate parent entity, before eliminating intra-group items.
  • Adjust financial accounting net income or loss to the GloBE base: The net income or loss determined above is modified to account for specific book-to-tax differences that are justified on policy grounds. These adjustments include:
    1. Excluded dividends.
    2. Excluded equity gain or loss: Avoids double counting of previously taxed income and aligns with participation exemptions and similar relief common to many jurisdictions.
    3. Policy disallowed expenses: Disallows deduction for illegal payments.
    4. Stock-based compensation: Prevents top-up tax arising in respect of book-to-tax differences associated with stock-based compensation plans.
    5. Asymmetric foreign currency gains and losses: Adjustments are made to avoid distortions from arising where the functional currencies used for accounting and tax are different.
  • Allocate GloBE income or loss based on tax treatment: The GloBE income or loss is allocated between a permanent establishment and the main entity, or to the owners of a flow-through entity, in accordance with the local tax treatment.
Step 3 – Adjusted covered taxes

Determine taxes attributable to the income of a constituent entity.

The determination of covered taxes for a constituent entity involves considering the current taxes paid by the entity for the fiscal year, with adjustments made to account for certain timing differences. In certain cases, covered taxes are allocated from one constituent entity to another. If there are changes in tax liability after filing, any additions or reductions to taxes are identified and allocated to specific jurisdictions and time periods.

Step 4 – Effective tax rate and top-up tax

Calculate the effective tax rate of all constituent entities located in the same jurisdiction and determine the resulting top-up tax.

The top-up tax of each low-taxed constituent entity is computed by:

  • Calculating the top-up tax percentage for each low-tax jurisdiction.
  • Applying the top-up tax percentage to the excess profits of the jurisdiction.
  • Deducting the amount of top-up tax imposed under a qualified domestic minimum tax.
  • Allocating the jurisdictional top-up tax to the constituent entities in the jurisdiction in proportion to their GloBE income.
Step 5 – IIR and UTPR

Impose top-up tax under IIR or UTPR in accordance with the agreed rule order.

The top-up tax is first imposed under the IIR on a parent entity with an ownership interest in the low-taxed constituent entity. If there is any residual amount of top-up tax that remains unallocated after the IIR applies, the UTPR allocation mechanism results in a liability for top-up tax in the jurisdictions that introduced the UTPR.

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