Financial Reporting Council Proposes to Temporarily Waive Deferred Tax Accounting Requirement Under Pillar Two Rules

The Financial Reporting Council (FRC) has issued a financial reporting exposure draft (FRED) on the reporting of deferred tax. The FRC approach in the proposal mirrors the suggestion of the International Accounting Standards Board (IASB) to amend IAS 12. This introduces a temporary exception from the requirement to account for deferred taxes arising from the Pillar Two rules.

Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – International tax reform – Pillar Two model rules sets out the text of the proposed accounting standard. The FRC proposals are to amend Section 29 Income Tax of FRS 102, The Financial Reporting Standard, applicable in the UK and Republic of Ireland with a temporary exception from the requirement to account for deferred taxes arising from the Pillar Two rules. A decision will be made in future whether to remove this exception or make it permanent. The FRED follows the publication by the Organisation for Economic Co-operation and Development (OECD) of its Pillar Two model rules which aim to ensure that large multinational groups pay a minimum amount of tax on income arising in each jurisdiction in which they operate.

The proposals are subject to consultation which ends on 24 May 2023 with the intention of finalising any resulting amendments in summer 2023.

Chris Danes (Tax Partner, MHA, Global Tax Solutions) concludes “These new rules now bring additional financial reporting considerations for groups impacted by the complex Pillar 2 tax rules. This applies for accounting periods commencing 1 January 2023 and beyond, so now there are even more aspects of these evolving rules to prepare for during 2023.”

From the OECD

IASB Approves Amendments to Give Temporary Relief from Deferred Tax Accounting Arising from Pillar Two Reform

On 11 April 2023, the International Accounting Standards Board (IASB) held a special meeting concerning the implications of Pillar Two rules in relation to IAS 12 Income Taxes.

The 13 members of the IASB (one member was absent) voted generally in line with the recommendations coming from the technical staff with some nuances in terms of the disclosures part when the OECD Pillar Two rules are enacted or substantively enacted but not yet in effect (for prior coverage, see IASB Tax Proposals Aim to Prevent Uncertainty Surrounding OECD Pillar Two Rules (11 Jan. 2023)).

The IASB confirmed in a consensus a temporary exception to recognize and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes. The temporary exception will be mandatory and there will be no specific timeline for how long it will apply.

The same agreement between the members was also in respect of amending IAS 12 by requiring an entity to disclose separately its current tax expense or income related to Pillar Two income taxes when the rules are in effect.

A more scattered picture between the members emerged when discussing the disclosure requirements when the rules are enacted or substantively enacted but not yet in effect. Such rather polarized opinions mimicked the input received from stakeholders during the consultation process.

In the end, a compromise emerged with the view that the disclosures should consider three dimensions:

a disclosure objective aimed at helping users of financial statements to understand the entity's exposure to Pillar Two income taxes arising from the rules;

The final amendments to IAS 12 Income Taxes covering the above points are expected to be issued by the end of May 2023.

The first disclosures based on the regulations are expected to start in Q1 2024, which leaves groups in scope short time to prepare, and also at a time when many uncertainties exist around the rules as such and around their implementation in local countries' laws.

MNEs would probably want more clarity on some aspects of the disclosures in relation to the rules. For example, the manner in which Qualified Domestic Minimum Top-Up Taxes are implemented locally and the way Transactional Safe Harbours fit into the timing of the disclosures still raise doubts.

Find out more about BEPS 2.0

For more information on the BEPS tax framework or other corporate international tax matters, please Contact Us, or email Chris Denning or Chris Danes from our International Tax team, who will be happy to assist:

Chris Denning, Head of Corporate International Tax: [email protected]
Chris Danes, Tax Partner: [email protected]

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