Entry Into Effect of Pillar Two Rules May Impact Financial Statement Disclosure Requirements

As we enter 2024, large multinational entity (MNE) groups with consolidated revenue in excess of EUR 750 million are facing the entry into force of the landmark Pillar Two rules in a growing number of jurisdictions. 

MNEs operating in jurisdictions that have adopted the rules from 2024 will have to contend with increased reporting and disclosure requirements, including potentially disclosure in 2023 financial statements as well as a top-up tax if a jurisdiction in which they operate has an effective tax rate below 15% based on the GloBE calculation. 

Legislative Implementation Status

At least 25 jurisdictions have enacted laws effective January 1, 2024, and more are expected to follow, with potential back-dating to January 1, 2024, in some cases (for example, the EU member states). The jurisdictions that have already enacted Pillar Two rules include:  

• EU countries (including France, Germany, Ireland, Italy, Luxembourg, and the Netherlands), with the exception of some smaller countries, such as the Baltic states, that have opted to exercise their right to delay implementation of the Pillar Two rules to 2029;
• Japan (applying to fiscal years beginning on or after April 1, 2024);
• Norway;
• South Korea;
• Switzerland (the rules include only a qualified domestic minimum top-up tax (QDMTT) that is effective January 1, 2024, with an income inclusion rule (IIR) expected to become effective January 1, 2025); and
• United Kingdom
  
  

Significant markets that have yet to implement Pillar Two include Brazil, China, India and the U.S.; however, the rules may still apply to MNEs headquartered or otherwise operating in these jurisdictions if they have operations in a jurisdiction that has implemented the rules.  

The OECD published its third set of administrative guidance on the application of the Pillar Two rules on December 18, 2023. The new guidance supplements the previously released Commentary and the first two installments of administrative guidance. (See OECD Releases Third Installment of Pillar Two Administrative Guidance)

Financial Statement Disclosures

Although the OECD Pillar Two rules apply for accounting periods commencing on or after January 1, 2024, in many jurisdictions, calendar-year companies may need to consider disclosure requirements on the expected impact of Pillar Two in the 2023 annual financial reporting cycle under both U.S. GAAP and IFRS. 

For U.S. GAAP purposes, SEC registrants should evaluate whether Pillar Two presents a material uncertainty that management expects could significantly impact the company’s future operations and overall financial position.  Public filers should consider adding Management Discussion and Analysis (MD&A) disclosures around the scope and nature of the Pillar Two effects, if anticipated to be material to the company’s financial results in 2024 and beyond. 

On the IFRS front, the recent amendments to IAS 12 introduced targeted disclosure requirements that would apply for annual periods beginning on or after January 1, 2023. For reporting periods during which Pillar Two is enacted or substantively enacted but not in effect yet, the guidance requires a disclosure of the IAS 12 exception, which prohibits deferred tax accounting for Pillar Two as well as the expected quantitative and qualitative impact of the Pillar Two exposure including a range, or a statement that such information is not known or estimable. As the rules are now in effect in many jurisdictions as of January 1, 2024, there are additional disclosure considerations for 2024 financial reporting, including the requirement to disclose the amount of current tax expense for any top-up tax. 

Recommended Action

With Pillar Two still being unchartered territory for a majority of large MNEs, tax departments need to understand the expectations of external auditors when it comes to 2023 financial reporting and disclosures. 

If an MNE’s Pillar Two exposure is expected to be material, it should be ready to present underlying analysis to substantiate the related disclosures in its year-end financials. 

MNEs that are in scope of Pillar Two should review and confirm whether they operate in any jurisdictions that have implemented the Pillar Two rules from January 1, 2024, and if impacted, undertake further modeling and analysis to assess the impact.    

¹ Item 303(a) of SEC Regulation S-K