How does the IASB temporary exception for Pillar Two top-up taxes work under IAS 12?

The IASB introduced a mandatory temporary exception under IAS 12 that prohibits entities from recognising or disclosing deferred tax assets and liabilities arising from Pillar Two top-up taxes, while requiring enhanced current-period disclosures to keep users informed of exposure. - Scope of the exception (IAS 12.4A): The temporary exception applies specifically to income taxes arising from Pillar Two legislation enacted or substantively enacted by a jurisdiction. It is mandatory, not an accounting policy choice — entities cannot opt out and recognise deferred tax on Pillar Two amounts even if they believe their deferred tax calculations are reliable. - No deferred tax recognised (IAS 12.4A–4C): Deferred tax assets (e.g., on loss carryforwards that might offset future top-up tax) and deferred tax liabilities (e.g., on temporary differences that could increase the effective tax rate under GloBE rules) are both excluded from the statement of financial position. This prevents potentially misleading numbers given the significant uncertainty in modelling Pillar Two impacts across multiple jurisdictions. - Current tax treatment remains intact (IAS 12.4C): Top-up taxes that are actually due for the period — i.e., crystallised current tax liabilities under Pillar Two — are recognised as current tax expense in the normal way under IAS 12. The exception is exclusively for the deferred component.

How should a group apply the QDMTT safe harbour under Pillar Two, and what is the accounting impact on the current tax line under IAS 12?

- Disclosure of current exposure (IAS 12.88A–88D, effective for periods beginning on or after 1 January 2023, with the amendments issued May 2023): Before Pillar Two legislation is enacted in a jurisdiction, entities must disclose their known or reasonably estimable exposure to the top-up tax. After enactment, entities disclose the current tax expense recognised for Pillar Two top-up taxes separately from other current tax. Qualitative disclosure of the jurisdictions affected is also required. - Interaction with uncertain tax positions (IAS 12 / IFRIC 23): Where the amount of Pillar Two top-up tax payable is uncertain (e.g., due to transitional safe harbour calculations still being assessed), IFRIC 23 continues to apply to the measurement of the current tax liability. The temporary exception does not remove IFRIC 23's requirements. - Transitional safe harbours: Although safe harbour rules (Qualified Domestic Minimum Top-Up Tax, QDMTT) are set by the OECD, not the IASB, their accounting consequence is simply that current top-up tax may be nil or reduced in qualifying jurisdictions. This affects the current tax line, not the deferred tax exception. A multinational group operates in Country X, which enacted Pillar Two legislation effective 1 January 2024. The group's effective tax rate in Country X is 9%, generating a top-up tax liability of €2.4 million for the year ended 31 December 2024. Separately, the group has deferred tax assets of €800k in Country X that, under normal IAS 12 analysis, might partially offset future Pillar Two exposure.

If a jurisdiction enacts Pillar Two legislation mid-year, how is the current top-up tax measured and disclosed for that transitional period under IAS 12.88C?

| Account | Dr (€'000) | Cr (€'000) | |---|---|---| | Current tax expense (P&L) | 2,400 | | | Current tax liability (SFP) | | 2,400 | No journal entry is recorded for the €800k deferred tax asset — it is neither recognised nor disclosed as a deferred tax balance under the mandatory exception (IAS 12.4A). The notes disclose the €2,400k Pillar Two current tax expense separately and identify Country X as an affected jurisdiction (IAS 12.88C). - Treating the exception as optional: Some preparers mistakenly believe they can elect to apply IAS 12 in full to Pillar Two if their modelling is mature. The exception is mandatory — recognising Pillar Two deferred tax is non-compliant (IAS 12.4A). - Omitting pre-enactment disclosures: In periods before Pillar Two is enacted locally, entities must still disclose known or reasonably estimable exposure (IAS 12.88A–88B). Waiting until enactment to provide any Pillar Two disclosure is an audit deficiency and a common comment letter finding.

Can deferred tax assets recognised before Pillar Two enactment (e.g., on carried-forward losses) be retained on the balance sheet, or must they be derecognised under the IAS 12.4A exception?

- Confusing QDMTT with a separate tax regime: A Qualified Domestic Minimum Top-Up Tax is still a Pillar Two top-up tax for IAS 12 purposes. The deferred tax exception still applies; only the amount of current tax may differ due to safe harbour relief. - IAS 12.4A: Establishes the mandatory temporary exception — no recognition or disclosure of Pillar Two deferred tax assets or liabilities. - IAS 12.4C: Confirms that current top-up taxes due are recognised under normal IAS 12 current tax principles. - IAS 12.88A–88B: Pre-enactment disclosure of known or reasonably estimable Pillar Two exposure. - IAS 12.88C–88D: Post-enactment disclosure requirements, including separately presented current tax expense for top-up taxes and affected jurisdictions. - IFRIC 23.6–23.8: Continues to govern measurement of uncertain current tax positions, including uncertain Pillar Two current tax liabilities.

IAS 12 Pillar Two Top-Up Tax

IAS 12 Pillar Two Top-Up Tax — Core Rule

The IASB introduced a mandatory temporary exception under IAS 12 that prohibits entities from recognising or disclosing deferred tax assets and liabilities arising from Pillar Two top-up taxes, while requiring enhanced current-period disclosures to keep users informed of exposure.

How IAS 12 Pillar Two Top-Up Tax Works

Scope of the exception (IAS 12.4A): The temporary exception applies specifically to income taxes arising from Pillar Two legislation enacted or substantively enacted by a jurisdiction. It is mandatory, not an accounting policy choice — entities cannot opt out and recognise deferred tax on Pillar Two amounts even if they believe their deferred tax calculations are reliable.

No deferred tax recognised (IAS 12.4A–4C): Deferred tax assets (e.g., on loss carryforwards that might offset future top-up tax) and deferred tax liabilities (e.g., on temporary differences that could increase the effective tax rate under GloBE rules) are both excluded from the statement of financial position. This prevents potentially misleading numbers given the significant uncertainty in modelling Pillar Two impacts across multiple jurisdictions.

Current tax treatment remains intact (IAS 12.4C): Top-up taxes that are actually due for the period — i.e., crystallised current tax liabilities under Pillar Two — are recognised as current tax expense in the normal way under IAS 12. The exception is exclusively for the deferred component.

Disclosure of current exposure (IAS 12.88A–88D, effective for periods beginning on or after 1 January 2023, with the amendments issued May 2023): Before Pillar Two legislation is enacted in a jurisdiction, entities must disclose their known or reasonably estimable exposure to the top-up tax. After enactment, entities disclose the current tax expense recognised for Pillar Two top-up taxes separately from other current tax. Qualitative disclosure of the jurisdictions affected is also required.

Interaction with uncertain tax positions (IAS 12 / IFRIC 23): Where the amount of Pillar Two top-up tax payable is uncertain (e.g., due to transitional safe harbour calculations still being assessed), IFRIC 23 continues to apply to the measurement of the current tax liability. The temporary exception does not remove IFRIC 23's requirements.

Transitional safe harbours: Although safe harbour rules (Qualified Domestic Minimum Top-Up Tax, QDMTT) are set by the OECD, not the IASB, their accounting consequence is simply that current top-up tax may be nil or reduced in qualifying jurisdictions. This affects the current tax line, not the deferred tax exception.

IAS 12 Pillar Two Top-Up Tax — Practical Example

A multinational group operates in Country X, which enacted Pillar Two legislation effective 1 January 2024. The group's effective tax rate in Country X is 9%, generating a top-up tax liability of €2.4 million for the year ended 31 December 2024. Separately, the group has deferred tax assets of €800k in Country X that, under normal IAS 12 analysis, might partially offset future Pillar Two exposure.

Journal entry — current top-up tax recognised

Account	Dr (€'000)	Cr (€'000)
Current tax expense (P&L)	2,400
Current tax liability (SFP)		2,400

No journal entry is recorded for the €800k deferred tax asset — it is neither recognised nor disclosed as a deferred tax balance under the mandatory exception (IAS 12.4A). The notes disclose the €2,400k Pillar Two current tax expense separately and identify Country X as an affected jurisdiction (IAS 12.88C).

IAS 12 Pillar Two Top-Up Tax — Common Pitfalls

Treating the exception as optional: Some preparers mistakenly believe they can elect to apply IAS 12 in full to Pillar Two if their modelling is mature. The exception is mandatory — recognising Pillar Two deferred tax is non-compliant (IAS 12.4A).

Omitting pre-enactment disclosures: In periods before Pillar Two is enacted locally, entities must still disclose known or reasonably estimable exposure (IAS 12.88A–88B). Waiting until enactment to provide any Pillar Two disclosure is an audit deficiency and a common comment letter finding.

Confusing QDMTT with a separate tax regime: A Qualified Domestic Minimum Top-Up Tax is still a Pillar Two top-up tax for IAS 12 purposes. The deferred tax exception still applies; only the amount of current tax may differ due to safe harbour relief.

IAS 12 Pillar Two Top-Up Tax — Key Paragraphs

IAS 12.4A: Establishes the mandatory temporary exception — no recognition or disclosure of Pillar Two deferred tax assets or liabilities.
IAS 12.4C: Confirms that current top-up taxes due are recognised under normal IAS 12 current tax principles.
IAS 12.88A–88B: Pre-enactment disclosure of known or reasonably estimable Pillar Two exposure.
IAS 12.88C–88D: Post-enactment disclosure requirements, including separately presented current tax expense for top-up taxes and affected jurisdictions.
IFRIC 23.6–23.8: Continues to govern measurement of uncertain current tax positions, including uncertain Pillar Two current tax liabilities.