Remember the global tax deal? It seeks to establish some broad and fundamental ground rules for international taxation — and it is still a work in progress.

Recently, the International Accounting Standards Board (IASB) invited businesses to weigh in on its proposal to amend the International Financial Reporting Standards for Small and Medium-Sized Entities (SMEs) by introducing a temporary exemption from income tax accounting rules tied to the global tax deal. 

SMEs are businesses that maintain revenues, assets or a number of employees below a certain threshold. Each country has its own definition of what constitutes a small and mid-size enterprise. It normally pertains to enterprises that have no public accounting reporting requirement and have certain specific revenue thresholds for tax reporting purposes.

The Two Pillars

On June 1, 2023, the IASB said it is seeking public input on Exposure Draft (ED) No. 2023-3, International Tax Reform — Pillar Two Model Rules — Proposed Amendments to the IFRS for SMEs Standard. The proposal would introduce a temporary and mandatory exception so some companies will not have to account for deferred taxes arising from Pillar Two model rules that were issued by the Organisation for Economic Co-operation and Development.

The global tax deal comprises two such pillars:

Pillar One: Applies to multinational enterprises (MNEs) with revenues exceeding €20 billion and with more than 10% profitability. It also allocates 25% of excessive profit to market jurisdictions where the MNE has quantitative nexus.

Pillar Two: Serves as a 15% minimum “book tax” based on a qualifying company’s financial statements. More than 135 countries and jurisdictions representing more than 90% of global gross domestic product have agreed to the Pillar Two model rules.

The IASB also proposed to:

• Introduce targeted disclosure requirements in periods when Pillar Two legislation is in effect
• Clarify “other events” in the disclosure objective for income tax including enacted or substantively enacted Pillar Two legislation

This marks the first time the IASB has proposed urgent amendments to the standard outside its periodic three-year cycle review process.

Self-Contained Package

The IFRS for SMEs standard is a self-contained package of rules developed in 2009 for companies that do not have public accountability and publish general-purpose financial statements for external users. More than 80 countries, including the United States, permit the use of the standard.

The proposal would specifically amend Section 29, Income Tax, in the IFRS for SMEs standard so that a business would not have to:

• Recognize deferred tax assets and liabilities related to Pillar Two income taxes
• Disclose information that would otherwise be required by paragraphs 29.39-29.41 about deferred tax assets and liabilities related to Pillar Two income tax.

Please note, an SME would be required to disclose it has applied the exception.

Deadline for Comments

Don’t miss your opportunity to comment on this proposal. All comments are due to the IASB by July 17, 2023.

Stay tuned. Moore Doeren Mayhew will keep you apprised of the standard and its final requirements impacting you and your business. In the meantime, should you have questions, contact one of our international tax advisors today.