Keith Leung, KPMG
Rob Brouwer, KPMG
In October 2021, more than 135 jurisdictions representing more than 90% of the global GDP agreed to a significant international tax reform under the governance of the Organization for Economic Cooperation and Development (OECD), to address concerns about uneven profit distribution and the tax challenges of an economy that is increasingly highly digitalized. The objective is to ensure a fairer distribution of profits and taxing rights among countries where an entity has operations. Many countries are now in the process of amending their local tax laws to implement this global minimum top-up tax and many of these jurisdictions are expected to enact such changes to tax laws in 2023, with these changes coming into effect in 2024.
The reform aims to ensure that large multinational companies (i.e. consolidated revenues of €750 million or more) pay a minimum rate of 15% on income arising from each jurisdiction in which they operate. The rules are complex, but effectively those companies will need to use the Global Anti-Base Erosion Rules (GloBE) model rules to calculate their effective tax rate (ETR) for each jurisdiction in which they operate. In cases where the blended ETR for all its businesses in a specific jurisdiction is below the 15% minimum rate, the company will be liable to pay a top-up tax for the difference.
With the adoption of these tax changes on the horizon, investors are keen to understand the impact these rules will have on the companies in which they’re invested. In turn, those companies are seeking urgent clarity around key accounting considerations related to measuring and disclosing the expected impact of the minimum top-up tax.
Until those accounting implementation questions are resolved, the IASB has introduced temporary relief from the existing tax accounting rules (IAS 12) on accounting for deferred tax that would otherwise have applied to addressing the impact of these new rules. Effectively, companies are temporarily exempt from accounting for and disclosing any deferred taxes related to the top-up tax; they are required, however, to acknowledge that such relief has been applied.
In the meantime, the IASB has also introduced new required disclosures effective for annual financial statements as of December 31, 2023, and subsequent interim periods. Once the relevant tax law is enacted or substantively enacted in any given country (even before its effective date) companies are required to disclose information that is known or that can be reasonably estimated, in order to enable readers of the financial statements to understand their exposure to the minimum top-up taxes at the reporting date. The disclosures can include both qualitative and quantitative information. For example, companies can disclose how they are affected by minimum top-up taxes and which jurisdictions are expected to be impacted most. Companies may also disclose the proportion of profits that may be subject to this tax and the expected change in the average effective tax rate if such legislation had been effective.
Therefore, companies operating in many jurisdictions will need to carefully monitor the enacted or substantively enacted changes to tax laws in each jurisdiction, assess the impact of the GloBE model rules and determine what disclosures they need to provide.
The global minimum top-up tax may have a significant impact in Canada for the many large Canadian companies with global sales and distribution. Given that the OECD continues to release updates, and as countries enact the implementing tax legislation, investor relations professionals should maintain their understanding of the expected impact of the minimum top-up tax in order to effectively communicate these complexities to investors.
Keith Leung, CPA, CA is a Senior Manager, Accounting Advisory Services, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.