IASB Allows Temporary Exception to Reporting Requirements for Deferred Taxes Related to BEPS 2.0

The IASB has granted a temporary exception to the requirements for reporting deferred taxes in financial statements, to address accounting issues arising from the implementation of the Pillar 2 global minimum income tax. Under the amendment, companies will also be subject to additional disclosure requirements to maintain transparency for investors. Affected MNEs should begin assessing their exposure to the BEPS 2.0 Pillar 2 income taxes, and those with a presence in Hong Kong and the Chinese mainland should monitor updates to local reporting rules to ensure compliance.

The International Accounting Standards Board (IASB) has amended the IAS 12 Income Taxes in response to the impact of the Pillar 2 Model Rules of the OECD. 

The IAS 12 Income Taxes are a section of the International Financial Reporting Standards (IFRS) dealing with deferred tax liabilities or deferred tax assets. Under the Pillar 2 model rules, which form a part of the BEPS 2.0 framework (which stands for “base erosion and profit shifting”), member countries agree to implement a global minimum tax rate of 15 percent on income derived within their jurisdictions.  

This framework has been implemented in order to prevent MNEs from evading taxes by declaring profits in a low-tax jurisdiction. According to the OECD, BEPS practices cost countries around US$100 billion to US$240 billion in lost revenue annually, equivalent to around 4 to 10 percent of the global corporate income tax revenue.  

Both the Chinese mainland and Hong Kong’s accounting standards have substantially converged with the IFRS accounting standards, and both are signatories of the BEPS 2.0 framework.

More specifically, the GloBE Rules require MNEs to calculate the effective tax rate for each jurisdiction in which they have operations and, in the event that the tax rate falls below 15 percent in any jurisdiction, pay top-up tax to make up the difference. 

There has been confusion over how the top-up taxes should be recorded for publicly listed MNEs operating within the jurisdictions subject to the GloBE Rules. This includes whether or not the top-up taxes are included within the scope of the IAS 12 Income Taxes, and whether the GloBE Rules create new temporary differences for deferred taxes. 

Under the IAS 12 Income Taxes, companies are required to recognize their deferred tax liability or deferred tax assets for the differences between the tax base of an asset or liability and its carrying amount in the balance sheet.

The amendment to the IAS 12 Income Taxes effectively waives the requirement for companies to report their deferred taxes, providing a “temporary exception—to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules.” Companies can benefit from the temporary exception immediately and are also required to disclose if they have applied the exception to investors. 

In addition to the exception clause, the amendment will also enable “targeted disclosure requirements—to help investors better understand a company’s exposure to income taxes arising from the reform, particularly before legislation implementing the rules is in effect.” The announcement states that companies must provide these “disclosures to investors for annual reporting periods beginning on or after 1 January 2023”. 

These disclosures include information on the company’s current tax income related to Pillar 2 income taxes and information that is known or can be reasonably estimated on the company’s exposure to Pillar 2 income taxes. 

In an April meeting convened to discuss the amendments to IAS 12 Income Taxes, the IASB agreed that this disclosure should include “known or reasonably estimable qualitative and quantitative information about [the company’s] exposure at the end of the reporting period.” In addition, it stated that “To the extent information is not known or reasonably estimable, an entity would instead be required to disclose a statement to that effect.”

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The IASB has also released an exposure draft of an amendment to the IFRS for SMEs, which also proposes a temporary exception to the disclosure of deferred tax assets and liabilities, in order to facilitate the implementation of the GloBE Rules. 

Under the new disclosure requirements, MNEs adopting the IFRS will be required to assess their exposure to the Pillar 2 model rules and disclose it in financial statements. This may include implementing procedures and adapting accounting policies to capture the exposure of the Pillar 2 model rules. Relevant companies are advised to consider whether their current process and procedures are appropriate and adequate to obtain the information necessary for satisfying the disclosure requirements.  

Moreover, although the Chinese mainland and Hong Kong use standalone accounting standards (the Chinese Accounting Standards (CAS) and Hong Kong Financial Reporting Standards (HKFRS) respectively), both regions have committed to keeping their standards consistent with the IFRS and to implement the Pillar 2 model rules. Therefore, companies operating in these regions are advised to monitor local developments and amendments for potential changes to their financial reporting obligations arising from the BEPS 2.0 rules.  

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