Pillar Two Year-End Accounting Reminders

As the global regulations around Pillar Two continue to evolve, this article provides best practices and highlights recent SEC remarks on expected management’s discussion and analysis (MD&A) disclosure as you prepare year-end financial statements and filings.

Background

The Organisation for Economic Co-operation and Development (OECD) has developed the Pillar Two initiative to ensure that large international businesses pay a 15% minimum level of tax in every jurisdiction in which they operate as described in the Global Anti-Base Erosion (GloBE) rules. If a jurisdiction applies a tax rate that is less than the globally agreed minimum rate, the payer jurisdiction can collect a top-up tax. The rule generally applies to companies that have 750 million euro in group revenue. A transitional safe harbor is provided on a country-by-country reporting (CbCR) basis. The OECD does not have the authority to implement tax laws. While more than 140 countries signed an agreement to enact Pillar Two, only around 40 countries have enacted the required legislation to comply with the OECD initiative. The global corporate minimum tax will eventually be enforced via a variety of mechanisms, including:

Local Country Measure

The Pillar Two minimum tax will be determined on book income based on consolidated financial statements with certain adjustments, while most current tax systems are based on taxable income. This will require greater coordination between the tax and financial reporting teams, and new controls and procedures. Companies with intercompany sales, intellectual property transfers, and transfer pricing charges will have additional complexity in complying with the new requirements.

Accounting

In 2023, FASB staff responded to a technical inquiry that the global minimum tax imposed under the Pillar Two rules is an alternative minimum tax under Accounting Standards Codification 740, Income Taxes. Therefore, deferred tax assets and liabilities would not be recognized or adjusted for the estimated future effects of the minimum tax.

FASB staff stated that it believes “the GloBE minimum tax should be viewed as a separate but parallel tax system that is imposed to ensure that certain taxpayers pay at least a minimum amount of income tax … the potential obligation for GloBE taxes in future years is dependent on the generation of future adjusted net income.”¹

Internal Controls

Some of the required information needed to support the top-up tax and safe-harbor calculations may not be covered by existing internal controls. Some controls to consider include:

Monitoring effective dates by jurisdiction
Identification of legal entities impacted
Understanding the entire multinational enterprise group and its applicability to the GloBE rules
Understanding the GloBE treatment of legal entities impacted
Completeness and accuracy of the financial statements used to prepare CbCR and GloBE adjustments
Statutory to U.S. GAAP adjustments
New models or third-party vendors used

Here are some expected audit requests and supporting documentation you may be asked to provide for this year’s audit:

Completeness and accuracy of the legal org chart and analysis of in-scope entities
Completeness and accuracy of CbCR information
Relevance, eligibility, and reliability of data used in safe harbor calculations
Accuracy of the covered taxes and GloBE income calculations
Completeness and accuracy of the adjustments made to financial statement amounts
Relevance and reliability of the external model technology used to prepare Pillar Two calculations

SEC Disclosure Expectations

At the December 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC staff from the SEC’s Division of Corporation Finance clarified expectations on year-end disclosures related to Pillar Two, noting existing MD&A requirements that companies are required to consider. Specifically, companies should disclose matters that are reasonably likely to have a material impact on the operations or financial condition of the registrant. Changes in tax laws, such as Pillar Two, that could materially impact the company’s reported amounts of income taxes or net income should be included in these disclosures. While some countries have not finalized legislation, if a company could be materially impacted by the adoption of Pillar Two, it should quantify a reasonably likely impact or a range of reasonably likely outcomes in its MD&A. Due to the evolving nature of Pillar Two legislation in various jurisdictions, there may be inherent uncertainties that make quantification of the impact challenging initially. However, the SEC staff expects disclosures to be enhanced over time and cautioned that a material impact to the company’s operations that was not sufficiently forewarned may result in a comment from the SEC staff as part of its comment letter process.

Additional Resources

Conclusion

Forvis Mazars strongly recommends that affected taxpayers adopt internal protocols to evaluate their internal tax function to determine if GloBE tax provision and compliance requirements can be met by the effective dates. Internal protocols that affected taxpayers should consider include an expedited review of internal data systems and a data gap assessment to confirm that affected taxpayers can source relevant data to not only compute the GloBE tax but to also comply with required informational reporting. Affected taxpayers should also consider how and whether available safe harbors may be useful in scaling the tax accounting and compliance functions of affected taxpayers during the initial years of the GloBE rules. If you have any questions or would like assistance complying with the new guidance, please reach out to a professional at Forvis Mazars.

1 FASB staff’s view is based on the facts and circumstances outlined in the inquiry that relate to the OECD’s GloBE minimum tax. Any enacted tax law would need to be evaluated to determine whether those facts and circumstances are consistent with the inquiry.

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