BackgroundBackground

Background

Pillar Two model rules

BC2 In October 2021 more than 135 jurisdictions agreed to the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting’s Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Since then, the OECD has published model rules and other documents related to the second pillar of this solution (the Pillar Two model rules). The Pillar Two model rules provide a template that jurisdictions can translate into domestic tax law and implement as part of an agreed common approach.

BC3 The model rules:

(a) aim to ensure that large multinational groups pay a minimum amount of tax on income arising in each jurisdiction in which they operate;

(b) would achieve that aim by applying a system of top-up taxes that results in the total amount of taxes payable on “excess profit” in each jurisdiction representing at least the minimum rate of 15%; and

(c) typically require the ultimate parent entity of a group to pay top-up tax – in the jurisdiction in which it is domiciled – on profits of its subsidiaries that are taxed below 15%.

BC4 The rules are aimed at multinational groups with revenue in their consolidated financial statements exceeding €750 million in at least two of the four preceding fiscal years. The rules specify inclusion thresholds for some jurisdictions and exclude some types of entities from their scope.

Potential implications for income tax accounting

BC5 In response to stakeholder concerns about the implications for income tax accounting, in June 2023 the Board issued AASB 2023-2 Amendments to Australian Accounting Standards – International Tax Reform – Pillar Two Model Rules, which amended AASB 112 Income Taxes to introduce:

(a) a mandatory temporary exception to accounting for deferred taxes arising from the implementation of the Pillar Two model rules published by the OECD; and

(b) targeted disclosure requirements to help financial statement users better understand an entity’s exposure to income taxes arising from the reform, particularly in periods before legislation implementing the rules is in effect.

BC6 The mandatory temporary exception and related disclosures noted in paragraph BC5 apply to both Tier 1 and Tier 2 entities.[1]

BC7 However, to ensure Tier 2 entities are required to comply with disclosure requirements set out in AASB 1060 rather than the new requirements in AASB 112, the Board proposed to amend Appendix A of AASB 112 to extend the exemption from compliance with the disclosure requirements of AASB 112 for entities applying AASB 1060 to include the disclosure requirements added to AASB 112 by AASB 2023-2.