Navigating Global Tax Reforms: Pillar Two Model Rules and IFRS

How IFRS Responds to the OECD’s Global Minimum Tax Initiative — Insights for Large Entities and SMEs

The global tax landscape is undergoing a seismic shift. With the OECD’s Pillar Two Model Rules aiming to establish a 15% global minimum tax rate for large multinational entities, accounting and financial reporting standards have been forced to adapt swiftly. In response, the International Accounting Standards Board (IASB) has introduced amendments to IAS 12 Income Taxes and the IFRS for SMEs Standard. These changes are designed to bring clarity, reduce reporting burdens, and ensure consistency during the implementation phase of Pillar Two.

This article unpacks the amendments, highlights implications for both large entities and SMEs, and outlines what preparers should do now to stay compliant.

What Are the Pillar Two Model Rules?

The OECD’s Pillar Two initiative seeks to address tax base erosion by ensuring that large multinational groups (with consolidated revenue of €750 million or more in at least two of the last four years) pay a minimum effective tax rate of 15% in every jurisdiction they operate.

Pillar Two includes:

• Income Inclusion Rule (IIR)

• Undertaxed Profits Rule (UTPR)

These provisions were expected to be adopted globally from 2024 onwards, with different jurisdictions moving at varied speeds.

IAS 12 Amendments: Relief for Deferred Tax Accounting

To ease the transition for entities impacted by these reforms, the IASB amended IAS 12 in May 2023, introducing two key updates:

1. Temporary Recognition Exception

Entities do not have to recognize deferred tax assets or liabilities related to Pillar Two taxes. This avoids excessive complexity and potential inconsistency during initial application, especially where legislation is not yet enacted.

2. Targeted Disclosure Requirements

Even though deferred tax recognition is suspended, entities must disclose:

• That they applied the exception.

• Any known or estimable impact of the rules.

• Information about the exposure to these taxes in future periods.

These disclosures help users of financial statements understand the extent of an entity’s exposure to the Pillar Two regime, without prematurely embedding complex tax calculations into their financials.

IFRS for SMEs: Tailored Guidance for Smaller Subsidiaries

In September 2023, the IASB issued parallel amendments to the IFRS for SMEs Standard. Though most SMEs fall outside the scope of Pillar Two, some may be subsidiaries of large multinational groups and therefore subject to its requirements.

Key features include:

• Optional exemption from deferred tax recognition under the same conditions as full IFRS.

• Requirement to disclose current tax expense/income resulting from Pillar Two.

• Statement confirming the exemption has been applied, along with basic qualitative insights.

This simplified approach ensures compliance with group reporting needs while minimizing the cost and burden for smaller entities.

What Dawgen Global Recommends

1. Assess Your Exposure

   • Determine if your group structure or subsidiaries are in scope of the Pillar Two rules.

   • Review whether jurisdictions in which you operate have enacted or substantively enacted the legislation.

2. Update Disclosures

   • Implement the disclosure requirements in financial statements ending on or after 1 January 2023.

3. Educate Internal Stakeholders

   • Ensure finance and tax teams are aligned on the scope and impact of these changes.

   • SMEs under group audit requirements should liaise with parent companies to align disclosure content.

4. Monitor Local Legislation

   • Stay updated on how your operating jurisdictions are adopting the Pillar Two rules.

   • Dawgen Global can assist with real-time monitoring and interpretation.

Conclusion

The IASB’s amendments to IAS 12 and the IFRS for SMEs Standard reflect the urgency and complexity of implementing the OECD’s Pillar Two reforms. While the temporary exemption offers relief, the disclosure requirements ensure that transparency and comparability are maintained.

Dawgen Global stands ready to support clients—whether multinational corporations or SME subsidiaries—as they navigate this new global tax terrain.

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