Emerging ASC 740 Issue Related to OECD Pillar Two
Background
In October 2021, more than 135 countries and jurisdictions agreed to
participate in a “two-pillar” international tax approach developed by the
Organisation for Economic Co-operation and Development (OECD), which includes
establishing a global minimum corporate tax rate of 15 percent. The OECD published
the “Pillar Two”1 rules in December 2021 and issued additional commentary clarifying several
aspects of the rules in March 2022.
The Pillar Two rules are intended to ensure that large multinational enterprise
groups pay a minimum level of tax on the income arising in each of the jurisdictions
in which they operate. The rules do so by imposing a top-up tax on profits arising
in a jurisdiction whenever the effective tax rate, determined on a jurisdictional
basis, is below the 15 percent minimum rate. The Pillar Two rules include:2
- “[A]n Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity.”
- “[A]n Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR.”
As of December 31, 2022, South Korea has taken steps to enact the Pillar Two rules,
and it is expected that other jurisdictions will enact tax laws that conform to them
in the future. For more information about Pillar Two, see Deloitte’s International
Tax Alert, ”Pillar Two: OECD Inclusive Framework Global Minimum Tax Model
Rules” (available to subscribers only).
Accounting Considerations
Under U.S. GAAP, entities are required to adjust deferred tax
accounts for the effect of a change in tax law or rates in the period of enactment.
However, Pillar Two is based on financial accounting net income, with limited
adjustments (“GloBE3 income”). In addition, Pillar Two is designed to be an incremental tax to
ensure that entities are paying 15 percent of GloBE income on a jurisdictional
basis, and whether incremental tax will be due under Pillar Two depends on future
events, such as income earned or losses generated in a jurisdiction, permanent
items, and a substance-based exclusion. As a result, an entity may not know whether
it will always be required to remit an incremental tax under the Pillar Two rules.
These characteristics make the Pillar Two rules similar to the pre-2018 corporate
alternative minimum tax (AMT) system for which guidance exists in ASC 740.4
At the FASB’s February 1, 2023, meeting, the FASB staff announced
that the global minimum tax imposed under the Pillar Two rules, as published by the
OECD,5 is an AMT and that deferred taxes would not be recognized or adjusted for the
effect of global minimum taxes that conform to such Pillar Two rules. As support for
its conclusion, the FASB staff cited the guidance in ASC 740-10-30-10 and 30-12 as
well as ASC 740-10-55-31 and 55-32. Accordingly, the incremental effects of such
taxes would be accounted for as a period cost (i.e., the increase in tax payable
would only be reflected in an entity’s financial statements after a law is actually
effective).
Disclosure Considerations
While ASC 740 does not explicitly require disclosure of new tax laws,6 entities must provide certain forward-looking information under SEC Regulation
S-K, Item 303(a),7 related to “material events and uncertainties known to management that are
reasonably likely to cause reported financial information not to be necessarily
indicative of future operating results or of future financial condition.”
Before the enactment of proposed tax laws or revisions to existing tax rules,
entities should consider whether the potential changes represent an uncertainty that
management reasonably expects could have a material effect on the results of
operations, financial position, liquidity, or capital resources. Entities should
consider disclosing information about the scope and nature of any potential material
effects of tax law proposals or changes to existing tax rules. Similarly, management
should consider providing disclosures related to the new tax law if (1) enactment
occurs after the balance sheet date but before the financial statements are issued
or available to be issued, (2) management believes that such tax law could have a
material future financial effect on the entity, and (3) failure to do so might cause
the financial statements to be misleading.
Contacts
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Matt Himmelman
Partner
Deloitte & Touche LLP
+1 714 436 7277
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Patrice Mano
Partner
Deloitte Tax LLP
+1 415 783 6079
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Paul Vitola
Partner
Deloitte Tax LLP
+1 602 234 5143
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Krystle Kort
Partner
Deloitte Tax LLP
+1.415.783.6917
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Marla Lewis
Partner
Deloitte & Touche LLP
+1 203 708 4245
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Mark Crowley
Managing Director
Deloitte & Touche LLP
+1 203 563 2518
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Footnotes
1
OECD (2021), Tax Challenges Arising From the Digitalisation
of the Economy — Global Anti-Base Erosion Model Rules (Pillar Two):
Inclusive Framework on BEPS, OECD, Paris, https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm.
3
“Global anti-base erosion tax.“
4
FASB Accounting Standards Codification (ASC) Topic 740,
Income Taxes.
5
As jurisdictions enact laws in response to the Pillar Two
rules, each jurisdiction’s enacted law will ultimately need to be separately
evaluated for consistency with the framework.
6
ASC 740-10-50-9(g) does require as separate disclosure of the component of
income tax expense attributable to continuing operations the adjustments to
deferred tax liabilities and assets due to enacted changes in tax law.
7
SEC Regulation S-K, Item 303(a), “Management’s Discussion and Analysis of
Financial Condition and Results of Operations: Objective.”