Undertaking an early Pillar Two Impact Assessment allows MNE groups to identify potential top-up tax, ascertain and implement changes to processes and systems and provides time to consider restructuring to efficiently plan for Pillar Two.
before the financial statements are issued.
IAS 10(22)(h) states that changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities are an example of an event after the reporting period that would generally result in disclosure.
Under IAS 10(21) the disclosure will include:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
It is likely that in many cases an accurate estimate of the financial effect of the Pillar Two GloBE Rules could not be made in the period from when the announcement/enactment occurs and the date the financial statements are issued.
As such a statement to that effect would need to be made.
The IFRS does not define when a change in tax law has been ‘announced’ and therefore MNEs will need to carefully look at the status of Pillar Two in the jurisdictions they operate in and the progress of any proposals.
In particular, if a statement is made that there will be no material impact of Pillar Two on the group, management will need to be able to support this with, for example, an Impact Assessment.
See more on this at: Pillar Two Accounting Disclosures Under IFRS
Income for instance will be determined for financial reporting purposes, for tax purposes and also for Pillar Two purposes. Each is subject to separate rules.
Therefore, data extracted for Pillar Two purposes will be subject to a specific Pillar Two data transformation process that will then enable the calculation of the jurisdictional effective tax rate.
The effect of these rules is that:
1. In the transition period from November 30, 2021 and before the first year the GloBE rules apply to the group an intra group asset transfer is likely to reduce the GloBE ETR of an acquiring entity. A Pillar Two impact assessment can identify whether top-up tax could arise and assess other options.
2. After the MNE Group is within the scope of the GloBE rules, a cross-border asset transfer will give rise to a gain based on the market value of the asset unless it qualifies as a ‘GloBE reorganisation’.
A Globe Reorganisation occurs where there is a transfer of assets and:
(a) the consideration for the transfer is, in whole or in significant part, equity interests
(b) the transferors gain or loss on the assets is not wholly or partly subject to tax; and
(c) the tax law applicable to the transferee entity requires them to use the transferor’s tax base as the carrying value of the assets (the so-called ‘stand in the shoes’ principle).
This means that the transferor jurisdiction must provide for the tax-free deferral of the gain and the base cost is not uplifted in the transferee jurisdiction.
This should be considered as existing tax neutral provisions in domestic law may be less restrictive than the GloBE requirements. This would then drive down the Pillar Two ETR, with potential top-up tax.
MNE groups considering future reorganisations should therefore include in their impact assessments the effect of the Pillar Two GloBE rules on intra group asset transfers.
A special transitional rule in Article 9.1.2 of the OECD Model Rules applies to deferred tax assets that arise from permanent differences that are included in calculating taxable income but not Pillar Two GloBE income.
Note that this can apply to both timing differences and permanent differences where they aren’t reflected in Pillar Two GloBE income.
This will frequently arise from a permanent difference.
A permanent difference is a difference between the tax and accounting treatment that won’t reverse out over time.
Typical examples are many of the tax-specific deductions that don’t apply for accounting purposes, such as a specific enhanced tax deduction.
If they aren’t taken into account for Pillar Two GloBE income then this rule can apply.
Where the deferred tax asset is created in a transaction that takes place after 30 November 2021 it is not included in adjusted covered taxes.
This means that on the release of the asset there is no debit to the deferred tax charge in the P&L and no increase in covered taxes.
It is therefore necessary to track these adjustments from December 1, 2021. A Pillar Two impact assessment can be used to identify adjustments that need to be tracked and ensure required data points and systems are in place to collect the data.