How much do you really know about your Pillar 2 disclosure obligations? 

Thu 11 Apr 2024

With jurisdictions still in the process of enacting local tax law to introduce Pillar 2 Global Anti-Base Erosion (GloBE) rules, groups in scope of the new regulations could be forgiven for taking a watch-and-wait approach. However, a general lack of awareness of how the rules impact entities is also hindering much-needed communication between the C-suite, tax teams and auditors to meet Pillar 2 GloBE obligations. 

With some in-scope organisations having to make disclosures in their December 2023 year-end accounting period information, fully understanding your disclosure obligations and how recent Pillar 2 GloBE amendments will impact the tax function may be just the push now needed. 

A brief recap 

As a reminder, the Pillar 2 Global Anti-Base Erosion (GloBE) model rules published by the OECD in December 2021 have been agreed by jurisdictions representing more than 90% of global GDP. The rules aim to ensure that large multinational groups with global annual revenue exceeding €750m pay a minimum 15% tax on income arising in each jurisdiction in which they operate. If there are group entities established in jurisdictions where the income tax charge is below 15%, then a top-up tax will be paid by other entities in the group, provided that the jurisdictions of those other group entities have enacted Pillar 2 into domestic law.  

Can each entity within the group simply focus on its own reporting requirements?  

The way the model rules are constructed means that a parent entity that is based in an early-adopting Pillar 2 GloBE jurisdiction will trigger disclosure requirements encompassing the position of every single entity beneath. So, while a subsidiary entity may be based in a jurisdiction that has not yet enacted Pillar 2 GloBE legislation, it will still have to disclose via its parent entity. In terms of timing, this means producing information, albeit relatively basic, for periods ending 31 December 2023. It requires having quick access to accounting and other information needed from each subsidiary to allow the parent entity to make the necessary qualitative and quantitative disclosures on time. Data also needs to be sourced accurately and verifiable by auditors. 

How do different reporting requirements impact Pillar 2 GloBE disclosures?  

If the parent entity reports under the International Financial Reporting Standards (IFRS), it must report in the financial statements of all Pillar 2 GloBE qualifying entities within the group. US GAAP, has no requirement for Pillar 2 GloBE disclosures for 2023. In contrast, European Union-based entities reporting under French and German Generally Accepted Accounting Principles (GAAP), and all other GAAP based on IFRS such as Mexico, will have to report for all entities. At the same time, counterparts using UK GAAP will be subject to a much lighter approach to Pillar 2 GloBE disclosures where entities do not need to report if there is disclosure in the group accounts.  

What if an entity is based in a low-taxed jurisdiction? 

The UK, EU and other jurisdictions will start to collect tax from subsidiaries based in a low-tax jurisdiction under the Income Inclusion Rule (IIR) in 2024. Other jurisdictions have announced they will follow in 2025. From 2025, the UK, EU and other early adopter jurisdictions will also collect tax from any other low-taxed jurisdiction in the group, whether it is a subsidiary or not. Other countries will follow in 2026. 

What impact does the amendment to International Accounting Standards (IAS) 12 have on disclosures? 

Following concerns raised by stakeholders about accounting consequences arising from a current and deferred tax perspective, IAS 12 Income Tax was amended on 23 May 2023 to introduce an exception to the requirement to measure and recognise deferred tax on temporary differences arising from Pillar 2 tax legislation. Under IAS 12  disclosure is required in all affected entity accounts prepared under IFRS. Under FRS 101 or FRS 102, the disclosure is only required at entity level if there is not a group disclosure that contains the same information. 

Despite this welcome deferred tax relief, entities cannot disregard Pillar 2 in their financial statements. The amendment introduces new disclosure requirements in financial statements for annual reporting periods beginning on or after 1 January 2023, so processes must be implemented to capture the relevant information.  

What steps do I need to take now? 

There are a number of steps that affected groups will need to go through as they prepare to sign off their group accounts and, potentially, their entity accounts as well. 

1. Decide how much information to disclose,  

2. Pass this information through accounting technical groups,  

3. Develop procedures for calculating impacts of top-up tax in each relevant location  

4. Agree the approach with auditors 

5. Produce audit evidence to back up any disclosures in the accounts 

Finally, although the first Pillar 2 GloBE tax return may not be due until June 2026, the reporting requirements and need to understand the impacts of Pillar 2 GloBE internally and explain these to the markets is much closer than expected. Getting up to speed with developments and acting now will help reduce the challenges organisations will inevitably face.