IASB Proposes Easing Complexity of Global Tax Deal for Smaller Entities

Remember the global tax deal? It seeks to establish some broad and fundamental ground rules for international taxation — and it’s still a work in progress.

Recently, the International Accounting Standards Board (IASB) invited businesses to weigh in on its proposal to amend the “IFRS for SMEs” standard by introducing a temporary exemption from income tax accounting rules tied to the global tax deal. (Note: “IFRS” stands for “International Financial Reporting Standards” and “SMEs” is an abbreviation of “small and medium-sized entities.”)

The Two Pillars

On June 1, 2023, the IASB said it is seeking public input on Exposure Draft (ED) No. 2023-3, International Tax Reform — Pillar Two Model Rules — Proposed Amendments to the IFRS for SMEs Standard. The proposal would introduce a temporary and mandatory exception so that some companies won’t have to account for deferred taxes arising from Pillar Two model rules that were issued by the Organization for Economic Co-operation and Development.

The global tax deal comprises two such pillars. Pillar One applies to multinational enterprises (MNEs) with revenues exceeding €20 billion and with more than 10% profitability. It also allocates 25% of excessive profit to market jurisdictions where the MNE has quantitative nexus. Pillar Two serves as a 15% minimum “book tax” based on a qualifying company’s financial statements. More than 135 countries and jurisdictions representing more than 90% of global gross domestic product have agreed to the Pillar Two model rules.

The IASB also proposed to:

• Introduce targeted disclosure requirements in periods when Pillar Two legislation is in effect, and
• Clarify that “other events” in the disclosure objective for income tax include enacted or substantively enacted Pillar Two legislation.

This marks the first time that the IASB has proposed urgent amendments to the standard outside its periodic review.

Self-Contained Package

“The proposed amendments would provide timely relief for affected SMEs, while ensuring their users get the best information they can out of the financial statements,” IASB Chair Andreas Barckow said in a statement.

The IFRS for SMEs standard is a self-contained package of rules that was developed in 2009 for companies that don’t have public accountability and publish general purpose financial statements for external users. More than 80 countries, including the United States, permit use of the standard.

The proposal would specifically amend Section 29, Income Tax, in the IFRS for SMEs standard so that a business would neither:

• Recognize deferred tax assets and liabilities related to Pillar Two income taxes, nor
• Disclose information that would otherwise be required by paragraphs 29.39-29.41 about deferred tax assets and liabilities related to Pillar Two income tax.

An SME would be required to disclose that it has applied the exception.

Deadline for Comments Companies have until July 17, 2023, to submit comments on the IFRS for SMEs proposal. For more information about international tax issues and your business, contact your CPA.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.