How Different Accounting Standards Impact the Pillar Two ETR


1.1 Why the Accounting Standard Matters

1.2 Key Differences in Accounting Standards and the Impact on Pillar Two Top-Up Tax

    1.2.1 Inventory Valuation;
    1.2.2 Tangible Fixed Asset Valuation/Recognition;
    1.2.3 Development Costs;
    1.2.4 Intangible Assets;
    1.2.5 Revenue Recognition;
    1.2.6 Pushdown Accounting;
    1.2.7 Foreign Currency Exchange Differences;
    1.2.8 Deferred Tax; and
    1.2.9 Provisions

1.3 Conclusion

Why the Accounting Standard Matters

Accounting Standards have a significant impact on the Pillar Two GloBE effective tax rate (ETR) and top-up tax calculation.

The Pillar Two rules rely heavily on the financial accounting treatment, which in turn depends on the Accounting Standard used.

For instance, the starting point for the Pillar Two GloBE income (or loss) is the financial accounting net income or loss of the constituent entity.

This is the ‘below the line’ net income or loss of the group entity using the information used to prepare the consolidated financial accounts (ie after tax).

The financial accounting net income or loss is based on the Accounting Standard used to prepare the consolidated financial statements.

If the Constituent Entities’ financial accounts are prepared using an Accounting Standard different from the Ultimate Parent Entity (UPE)  that prepares the consolidated accounts, another Accounting Standard may be used if:

– the financial accounts of the constituent entity are maintained based on that Accounting Standard;

– the information contained in the financial accounts is reliable; and

– permanent differences in excess of 1 million euros arising from the application to transactions of a particular standard that differs from the UPE’s financial standard, conform to the UPEs Accounting Standard.

Therefore, permanent differences that are substantial would need to be adjusted to the UPEs accounting standard if they arise from the application of a different Accounting Standard.

Note that as this does not apply to timing differences, differences in the treatment of deferred tax between Accounting Standards would not be conformed to the UPEs Accounting Standard.

However, aside from determining Pillar Two GloBE income and tax for the ETR calculation, different Accounting Standards could have other impacts.

For instance, the GloBE rules apply a credit for any qualifying domestic minimum tax. This is offset against top-up tax initially calculated.

The basis of the calculation of the domestic minimum tax needs to conform with the GloBE rules in order for it to be qualifying.

A qualifying domestic minimum tax can be based on either an ‘Acceptable Accounting Standard’, which is where it is specifically listed in the Pillar Two Model GloBE rules, or another ‘Authorised Accounting Standard’.

The application of an authorised accounting standard may need to be adjusted where there are ‘material competitive distortions’.

A material competitive distortion arises where the application of a specific principle in an authorised accounting standard gives rise to a difference of 75 million euros or more when compared to the same IFRS principle.

This means, for instance, that a low-taxed group entity may choose to compute the excess profit for QDMTT purposes based on IFRS whilst its UPE uses GAAP of the USA in the preparation of its consolidated financial statements.

The option to use another accounting standard is applied in the draft domestic minimum tax legislation of a number of jurisdictions (eg Italy, Denmark, the Czech Republic and the UK).

It should also be borne in mind that the Pillar Two rules are not like domestic tax laws.

Domestic tax laws frequently use financial accounts as a starting point, but there are substantial adjustments to the financial accounting results.

The Pillar Two rules do have adjustments but they are a lot less.

This means that the treatment in the financial accounts (as determined by the relevant Accounting Standard) is more frequently followed.

Key Differences in Accounting Standards and the Impact on Pillar Two Top-Up Tax

Inventory Valuation

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