On 20 June 2023, Finance (No. 2) Bill 2023 completed its third reading in the House of Commons and became substantively enacted for IFRS (and UK GAAP) purposes. Royal Assent was received on 11 July and the Bill is therefore also considered enacted for US GAAP purposes.
This represents a significant milestone in the UK’s introduction of the OECD Pillar Two regime, as impacted tax balances in the financial statements are required to be adjusted for a change in law substantively enacted (or ‘enacted’ for US GAAP) at the balance sheet date.
Further details of the reporting requirements are included below, however this is a further reminder that implementation of the Pillar Two rules in the UK is fast approaching and groups should take action to ensure they are prepared for the requirements and challenges of the Pillar Two regime.
What do groups need to report and when?
For groups reporting under IFRS, the IASB has issued a narrow scope amendment to IAS 12 ‘Income Taxes’ that provides temporary relief from accounting for deferred taxes that arise from the implementation of Pillar Two, while also introducing targeted disclosure requirements.
For annual accounting periods in which the Pillar Two legislation is enacted or substantively enacted but not yet in force, an entity is required to disclose:
- Known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes arising from that legislation; and
- The fact that the entity has applied the exemption to recognising & disclosing information about deferred tax in relation to Pillar Two.
The disclosures relating to the known or reasonably estimable exposure to Pillar Two income taxes are required for annual reporting periods beginning on or after 1 January 2023, but they are not required to be disclosed in financial reports for any interim period ending on or before 31 December 2023.
For periods once the rules are in force, disclosure is required of:
- Current tax expense related to Pillar Two income taxes (shown separately from other current taxes); and
- The fact the entity has applied the deferred tax exemption.
To the extent an entity has a reporting date between the substantive enactment of the UK Pillar Two legislation and the endorsement of the IAS 12 amendment (expected in Q3 2023), it will need to develop an appropriate accounting policy in relation to deferred tax. Further details for such groups can be found in the PwC UK accounting manual.
For US GAAP reporters, the FASB has confirmed that Pillar Two tax is considered an alternative minimum tax, which means that (in line with IFRS) there is no requirement to account for deferred taxes for the estimated future effects of Pillar Two taxes. Further details for groups reporting under US GAAP can be found in the PwC US accounting manual.
Will the UK rules continue to change?
Notwithstanding the Bill having received Royal Assent, the UK legislation includes provision for future amendment (until December 2026) to ensure consistency with the OECD model rules and (both existing and future) commentary and guidance published by the OECD. The OECD recently released a package of documents including further administrative guidance. More details and PwC insight can be found in this tax policy alert.
As a consequence of such guidance and amendments to deal with drafting of the Finance No.2 Bill 2023 that has given rise to inadvertent departure from the model rules it will be necessary for revisions to be made to the enacted rules. Whilst the enacted legislation allows amendment by statutory instrument which could be effected pre commencement, that authority may not extend to some of the adjustments required under the Administrative Guidance such that these would need to be made through the Finance Bill which is unlikely to be enacted pre commencement. On 18 July, the UK government published draft clauses for Finance Bill 2024, which includes amendments to the Finance (No2) Act 2023 in order to:
- facilitate implementation of the Under Taxed Profits Rule (UTPR) in UK legislation; and
- make certain other amendments to the UK's Multinational Top Up Tax (MTT) legislation.
UTPR
The draft provisions do not include a commencement date, and will not take effect until they have been included in a Finance Bill. HMRC have confirmed the commencement date will not be before accounting periods beginning on or after 31 December 2024.
The legislation appears to broadly follow the intention of the OECD model rules, which operates based on the same computational framework as the MTT legislation and is intended to collect any top-up tax that is not collected under an IIR or QDMTT.
Other amendments
The other amendments to the MTT legislation appear to be intended to address a number of drafting issues and unintentional deviations from the OECD model rules, commentary and administrative guidance.
What about HMRC guidance?
On June 15, HMRC published a draft Pillar Two guidance manual on certain areas of the multinational top-up tax (MTT) and domestic top-up tax (DTT) legislation.
The draft guidance states that it is ‘partial’ and consists of three chapters of the HMRC guidance manual on MTT, which exists as a standalone manual and will be published in due course. The partial guidance is open for consultation until 12 September 2023.
The guidance includes some helpful clarifications regarding the application of the transitional safe harbour provisions, including a limited ability to ‘mix and match’ the source of qualified financial statements on a jurisdiction by jurisdiction basis, and confirmation one jurisdiction failing to qualify should not ‘taint’ all jurisdictions. However, the guidance does not address key areas of uncertainty regarding the application of Pillar Two in the UK to certain facts or circumstances. It remains to be seen whether these uncertainties are dealt with in future guidance addressing the computational provisions of Pillar Two.
The guidance does include a schema which maps the UK rules to the OECD model rules, commentary and administrative guidance which will be useful when interpreting the UK legislation. The guidance also acts as a helpful summary of some of the more basic aspects of Pillar Two for those that have yet to really dig into the detail.
How to get started?
Based on our experience, the three biggest challenges presented by Pillar Two are:
- Obtaining the data points necessary to compute the Pillar Two calculations, many of which do not currently exist (or are not easily accessible) within existing systems;
- Operationalising Pillar Two compliance and reporting; and
- Allocating sufficient (already stretched) resources to the above tasks.
Developing a comprehensive data strategy and identifying the necessary data points should be one of the first steps a group undertakes on its journey to be #PillarTwoReady. PwC’s Pillar Two Data Input Catalog sets out the necessary data points that are required to perform the Pillar Two calculations and provides insights on building a data strategy and achieving operational readiness.
While the recently released GloBE Information Return (GIR) introduces a slight relaxation in compliance requirements regarding jurisdictional reporting (rather than entity by entity), this does not change the amount of underlying data points that are required to perform the calculations.
Critical to successfully delivering on Pillar Two compliance and reporting will be a Group’s technology and transformation strategy. There is no ‘one size fits all’ solution but we recommend a connected approach which leverages as much as possible from a group’s existing technology, data gathering and compliance processes, while enhancing this with targeted technology and automations of existing processes. PwC’s Pillar Two Engine is a market leading quantitative analysis and compliance tool which can support this process and is configured to deliver calculations required for both the IIR/UTPR provisions as well as local domestic minimum top up taxes. Our Connected Compliance approach aims to improve efficiency and free-up limited internal resources.
To discuss the contents of this article, or any other points relating to Pillar Two, please contact the authors of this article directly, or speak to your usual PwC contact.
