The OECD's Pillar Two framework — a global minimum corporate tax rate of 15% applied on a country-by-country basis — is now in effect in over 50 jurisdictions. For multinational groups operating across these territories, the accounting implications under IFRS are significant, complex, and in many cases still being resolved by finance teams who have not yet completed their full assessment.
What Pillar Two Is and Who It Affects
Pillar Two applies to multinational enterprise (MNE) groups with consolidated annual revenues of €750 million or more in at least two of the four preceding fiscal years. It imposes a minimum effective tax rate (ETR) of 15% at a jurisdictional level, computed using a special Pillar Two accounting framework (GloBE rules) that differs from both local GAAP and IFRS.
Where an entity in a jurisdiction pays tax below the 15% minimum, a top-up tax is collected — either by the parent jurisdiction under the Income Inclusion Rule (IIR), by the local jurisdiction through a Qualified Domestic Minimum Top-up Tax (QDMTT), or by other group members through the Undertaxed Profits Rule (UTPR).
The Mandatory IAS 12 Exception
In response to the Pillar Two legislation, the IASB issued targeted amendments to IAS 12 in May 2023 introducing a mandatory temporary exception to recognising and disclosing deferred tax assets and liabilities arising from Pillar Two income taxes.
This exception is mandatory — entities cannot choose to apply the normal IAS 12 deferred tax accounting to Pillar Two. The rationale is that the GloBE rules use their own tax base and rate that differ from local accounting, making the standard deferred tax model unworkable without major complexity. As a result:
- No deferred tax assets or liabilities should be recognised for Pillar Two temporary differences
- The exception applies from the date of enactment in each jurisdiction
- Entities must disclose that they are applying the exception
"The IAS 12 mandatory exception resolves the deferred tax question, but it does not eliminate the need for complex current tax calculations and extensive new disclosures."
Current Tax: Calculating the Top-Up
While deferred tax is excepted, the current tax charge for Pillar Two top-up taxes must still be recognised in profit or loss. The challenge is that the GloBE computation uses a different income base, special adjustments (substance-based income exclusions, transition rules, safe harbours), and its own set of covered taxes — all of which must be tracked separately from the IFRS financial statements used for standard tax provisioning.
Three transitional safe harbours are available to simplify the calculation for qualifying entities in qualifying jurisdictions:
- De minimis safe harbour — applies where the jurisdiction has less than €10M revenue and €1M income
- Simplified ETR safe harbour — uses Country-by-Country Report (CbCR) data as a proxy for GloBE ETR
- Routine profits safe harbour — applies where the jurisdiction's GloBE income does not exceed the substance-based exclusion
These safe harbours expire after the transitional period (generally for fiscal years ending on or before 31 December 2026), so planning for the full GloBE computation is essential now.
New Disclosure Requirements Under IAS 12 para 88A–88D
The IAS 12 amendments introduce four new disclosure paragraphs specifically for Pillar Two:
- Para 88A — Disclose that the mandatory exception has been applied
- Para 88B — Disclose the current tax expense relating to Pillar Two income taxes separately from other income tax expense
- Para 88C — During the transition period, disclose the entity's exposure to Pillar Two using the CbCR effective tax rate by jurisdiction
- Para 88D — Additional narrative about the entity's assessment of Pillar Two impact where relevant
Para 88C is particularly demanding — it requires a country-by-country view of jurisdictional ETRs which many finance teams do not have readily available from their standard tax provisioning process. Integrating CbCR data into the financial statement disclosure process requires new data flows and controls.
Steps Finance Teams Should Take Now
- Confirm which jurisdictions the group operates in have enacted Pillar Two legislation and from what date
- Assess whether safe harbours are available in each jurisdiction and for how long
- Build the jurisdictional ETR model using CbCR data as a starting point
- Draft the Para 88A–88D disclosures and agree them with auditors early
- Prepare for safe harbour expiry: model the full GloBE computation before the transitional period ends
- Assess whether group treasury arrangements (IP structures, intra-group financing) create material Pillar Two exposure