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Research Article
Pillar Two disclosures in annual reports of European listed companies
expand article infoPieter Dekker‡, Marcel Kriek§
‡ EY, Amsterdam, Netherlands
§ PwC, Rotterdam, Netherlands

Corresponding author: Pieter Dekker ( pieter.dekker@nl.ey.com )

Academic editor: Annemarie Oord
© 2024 Pieter Dekker, Marcel Kriek.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation: Dekker P, Kriek M (2024) Pillar Two disclosures in annual reports of European listed companies. In: Oord A, Verhoek H (Eds) Het jaar 2023 verslagen. Maandblad voor Accountancy en Bedrijfseconomie 98(6): 353-364. https://doi.org/10.5117/mab.98.136265
Open Access

Abstract

This survey examines the impact of the Pillar Two income tax legislation as detailed in the 2023 annual reports of 100 large listed European firms. While 71% of companies indicated that the impact of Pillar Two income taxes was not significant, only a third of companies with an IFRS effective tax rate between 15% and 20% expected the impact to be insignificant. Approximately 25% of companies quantified the expected impact, with 90% of these disclosing it as a point estimate or a range of less than 1 percentage point of ETR. However, only 10% disclosed an expected increase in effective tax rate aligning with the OECD’s estimates. Pillar Two income taxes do not appear to have been a significant audit concern in the 2023 financial statements.

Keywords

Pillar Two, BEPS, financial statements, IFRS

Relevance to practice

This study shows how companies have disclosed the expected financial impact of the Pillar Two legislation and the impact on annual reports, but also the uncertainties that arise because of the introduction of Pillar Two income taxes. These results could be used by preparers, auditors, users and regulators when preparing and assessing disclosures about Pillar Two income taxes in future annual reports.

1. Introduction

In December 2021, the OECD (2021) released a framework for Pillar Two model rules or Global Anti-Base Erosion Rules (‘GloBE Rules’) that introduces a global minimum corporate tax rate of 15% applicable to multinational enterprise groups with global revenue over € 750 million. In December 2022, the Council of the European Union adopted Directive 2022/2523, incorporating the Model Standards into the European legal framework. The EU Directive set 31 December 2023 as the deadline for their transposition by the Member States into local legislation and stipulates that the corresponding provisions must enter into force for financial years beginning on or after that date.

The GloBE Rules introduced the following three new taxing mechanisms under which multinational enterprises (MNEs) would pay a minimum level of tax:

  • Primary rule: The Qualified Domestic Minimum Top-up Tax (QDMTT)

This rule effectively acts as a domestic floor and imposes a top-up tax on a jurisdictional basis in case entities within the jurisdiction have a consolidated GloBE effective tax rate (ETR) of less than 15%. If a jurisdiction does not implement QDMTT, other countries can impose a top up tax via the Income Inclusion Rule.

  • Secondary rule: The Income Inclusion Rule (IIR)

Under the IIR top-up tax is payable at the level of an ultimate parent entity or intermediate parent entity for the constituent entities1 located in low taxed jurisdictions. The top-up tax will be levied on the ultimate parent entity or the intermediate parent entity to arrive at the minimum tax rate of 15%.

  • Back stop rule: The Under Taxed Profits Rule (UTPR)

This rule will act as a backstop and will apply where the QMDTT and IIR have not captured the entire top-up tax.

1.1. IASB standard setting

The Pillar Two rules apply a system of top up taxes that result in the total amount of taxes payable on an MNE’s excess profit in a jurisdiction representing at least the minimum rate of 15%. Ordinarily, income taxes are levied on the entity that generated the underlying profit and any temporary differences that may arise will reverse in that entity as well. However, the Pillar Two model rules require the identification of undertaxed profits and introduce taxing mechanisms that require application of a top-up tax to the entity itself (QDMTT), the ultimate parent or intermediate parent entity (IIR), or a fellow group company (UTPR).

Considering the rapid introduction of the Pillar Two model rules by various jurisdictions, significant concerns were raised to the International Accounting Standards Board (IASB) regarding the accounting for such taxes. The primary issues revolved around the classification of top-up tax within the scope of IAS 12, particularly in the financial statements of subsidiaries, and the accounting for deferred taxes, which includes the identification of temporary differences, remeasurement of deferred taxes, and the determination of applicable tax rates. These complexities are compounded by the difficulty in forecasting tax rates due to multiple influencing factors. Additionally, there was scepticism about the practical value of reporting deferred tax information related to top-up tax, given the estimation involved in determining future tax rates. The urgency for clarity was underscored by the imminent application of these rules in certain jurisdictions, which threatened to result in diverse and potentially unhelpful accounting practices among entities. In response, the IASB acknowledged the need for more time to properly address these issues and to consult with stakeholders to ensure the consistent application of IAS 12, recognising that a resolution is unlikely before the enactment of new tax laws and their reflection in the accounting for deferred taxes.

As a result, in May 2023, the IASB issued International Tax Reform – Pillar Two Model Rules (Amendments to IAS 12) (the Amendments). The Amendments clarify that IAS 12 applies to income taxes arising from tax law (substantively) enacted to implement Pillar Two model rules, including tax law that implements QDMTT. The IASB amended the standard to (i) provide timely relief for affected entities (ii) to avoid diverse (inconsistent) interpretations of IAS 12 developing in practice and (iii) to improve the information provided to users of financial statements before and after Pillar Two legislation comes into effect. Such tax legislation, and the income taxes arising from it, are referred to as ‘Pillar Two legislation’ and ‘Pillar Two income taxes’, respectively.

The Amendments introduce a mandatory temporary exception in IAS 12 from recognising and disclosing deferred tax assets and liabilities related to Pillar Two income taxes. The IASB did not expand the scope of the temporary exception to include the measurement of deferred taxes recognised under domestic tax regimes.

The amendments also require the following disclosures in the notes to the financial statements that explain the impact of the introduction of minimum taxation on affected companies:

  • a statement that the entity has applied the mandatory temporary exception,
  • the current tax expense (income) related to Pillar Two income taxes, in the periods when the legislation is effective, and
  • for periods in which Pillar Two legislation is (substantively) enacted but not yet effective, disclosure of known or reasonably estimable information that helps users of financial statements understand the entity’s exposure arising from Pillar Two income taxes. To comply with these requirements, an entity is required to disclose qualitative and quantitative information about its exposure to Pillar Two income taxes at the end of the reporting period.

The temporary exception from recognition and disclosure of information about deferred taxes and the requirement to disclose the application of the exception, apply immediately and retrospectively upon issue of the Amendments.

1.2. Research population

In this article we will explore the impact that the introduction of Pillar Two income taxes and the amendments to IAS 12 had on the financial statements of large listed European companies. The purpose of this research is not only to explore the impact of Pillar Two income taxes on the financial performance and position of European companies, but also to research the behaviour of management in providing transparency around the impact.

We considered that European companies are more likely to be affected by Pillar Two income taxes as the EU required implementation of such taxes effective from 31 December 2023. We also considered that large listed companies are more likely to meet the size criteria in the Pillar Two legislation and be affected more than smaller, non-listed companies. We therefore included the top 100 companies in terms of free float market capitalisation as of April 2024 of the STOXX Europe 600 that apply International Financial Reporting Standards (IFRS). A list of companies surveyed can be found in the Appendix 1. For calendar year-end companies we surveyed the 2023 annual reports. For non-calendar year-end companies, we surveyed the annual report with a reporting date closing after 31 May 2023. We made that decision to make sure we captured the impact of the amendment to IAS 12.

All companies in the population met the Pillar Two threshold of EUR 750m revenue per year, with the lowest revenue being EUR 1,863m per year. For financial institutions there is still some debate about the definition of revenue for Pillar Two purposes, but as the revenue of companies in our population is well over the Pillar Two threshold, that issue is not of practical relevance for this population.

One company is incorporated in Jersey (which as of June 2024 had not enacted Pillar Two tax legislation) but is domiciled in Switzerland (which had enacted Pillar Two tax legislation as of the company’s balance sheet date). All other companies are incorporated in countries that had (substantively) enacted Pillar Two tax legislation as of the date of the financial statements that were analysed.

1.3. Structure of this research

Section 2 describes the main findings of the research, based on the analysis of the Pillar Two disclosures made by the companies in the population. The findings are presented in subsections, covering the following aspects: the application of the mandatory temporary exception, how does the disclosure of the population issued fare in terms of providing various quantitative and qualitative information regarding the impact of Pillar Two such as the disclosure of the tax impact expected from Pillar Two, and the countries involved in the Pillar Two income tax calculation; the application of the transitional safe harbour rules; and the placement of Pillar Two income tax disclosures in the annual reports. Section 3 concludes the paper by summarising the main results and implications of the research.

1.4. Limitations of this research

The impact of Pillar Two tax legislation depends to an important extent on the tax regime to which a parent and its group were subject prior to the enactment of Pillar Two tax legislation and whether the ultimate parent entity of the group is subject to Pillar Two tax legislation.

Table 1 contains an overview of the countries in which the parent companies in our population are incorporated. All parent companies are incorporated or domiciled in a jurisdiction that has enacted Pillar Two tax legislation. Therefore, the disclosures made by companies in our population will not be representative of those made by groups whose parent company is incorporated or domiciled in a jurisdiction that has not enacted Pillar Two tax legislation. In addition, as 80% of our population is incorporated in just five countries, our findings are not necessarily representative of the impact on companies in general.

Table 1.
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Number of companies for each country of incorporation.

Parent’s country of incorporation % of companies
France 21
UK 19
Germany 17
Switzerland 12
Netherlands 11
Italy 5
Spain 5
Sweden 4
Belgium 1
Denmark 1
Finland 1
Ireland 1
Jersey (domiciled in Switzerland) 1
Norway 1
Total 100

2. Impact of Pillar Two income taxes and the disclosure in annual reports

The companies in our population disclosed the impact of Pillar Two legislation in varying degrees of detail. We have, in the ensuing paragraphs, analysed the disclosures related to Pillar Two based on various yardsticks to gauge the depth and breadth of the information provided by the companies to their stakeholders in this regard and detailed out our findings.

2.1. Application of the mandatory temporary exception and disclosure highlighting amendments in IAS 12

2.1.1. Application of the mandatory temporary exception

The Amendments to IAS 12 require a company to disclose that it has applied the mandatory temporary exception in IAS 12 from recognising and disclosing deferred tax assets and liabilities related to Pillar Two income taxes. 93% of the companies specifically discloses that they applied the exception, either as part of the accounting policy disclosure or in the income taxes note. 7% of companies did not make the required disclosure, but 3% relates to companies that stated that the impact of Pillar Two income taxes was not significant. Reference in this regard is drawn to Table 2.

Table 2.
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Application of mandatory temporary exception disclosed.

% of companies Yes No
Does the entity disclose application of the mandatory temporary exception (IAS 12.88A)? 93% 7%

2.1.2. Disclosure mentioning change in accounting policy owing to amendments in IAS 12

The fact that there is a change in the accounting policy is required to be disclosed by the company in the financial statements. The abovementioned application of the mandatory temporary exception has been explicitly disclosed as a change in accounting policy by 91% of the companies within the population. Only 9% of the companies did not make an explicit reference highlighting that there was such a change in the accounting policy, but 7% relates to companies that stated that the impact of Pillar Two income taxes was not significant. Refer to Table 3 for your reference.

Table 3.
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Disclosure of change in accounting policy relating to IAS 12.

% of companies Yes No
Does the entity mention changes in accounting policy owing to Pillar Two (i.e., amendments in IAS 12)? 91% 9%

2.2. Current tax expense (income)

The Amendments to IAS 12 specifically require disclosure of the current tax expense (income) related to Pillar Two income taxes, in the periods when the legislation is effective. However, as the legislation only takes effect for periods starting on or after 1 January 2024, such disclosures were not present in the financial statements for the period examined.

2.3. Quantitative and qualitative disclosures

The Amendments to IAS 12 require for periods in which Pillar Two legislation is (substantively) enacted but not yet effective, disclosure of known or reasonably estimable information that helps users of financial statements understand the entity’s exposure arising from Pillar Two income taxes.

To comply with the abovementioned requirements, an entity is required to disclose qualitative and quantitative information about its exposure to Pillar Two income taxes at the end of the reporting period. That information need not necessarily reflect all the specific requirements of the legislation and could be provided in the form of an indicative range. The IASB has provided an illustration to give guidance on what might be construed as quantitative and qualitative disclosures. Quantitative information may include an indication of the proportion of the entity’s profits that potentially might be subject to Pillar Two income taxes and the average effective tax rate applicable to those profits; or an indication of how the entity’s average effective tax rate would have changed if Pillar Two legislation had been effective. Qualitative information may include information such as how the group is affected by Pillar Two legislation and the main jurisdictions in which exposures to Pillar Two income taxes might exist.

In this section we analyse the information that companies have disclosed regarding the impact of Pillar Two income taxes.

2.3.1. Significance and disclosure of impact (Quantitative Information)

As can be seen from Table 4, 71% of the companies explicitly states that the impact of Pillar Two income taxes is not expected to be significant. The companies that state that the impact of Pillar Two income taxes was not significant, rarely (3%) quantify the impact in monetary terms or as a percentage of the effective tax rate (ETR).

Table 4.
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Companies disclosing the quantitative impact of Pillar Two income taxes.

% of companies Number of companies %
Companies stating that the impact of Pillar Two income taxes is not significant 71%
No quantitative disclosure of impact 69 97%
Disclose quantitative impact 2 3%
71 100%
Companies making no such statement 29%
No quantitative disclosure of impact 8 28%
Disclose quantitative impact 21 72%
29 100%
100%

However, the companies that do not make such a statement quantify the impact in 72% of cases. The remaining 28% of the companies that does not make such a statement and do not quantify the impact, could be a combination of – (a) companies that are significantly affected by Pillar Two but that do not quantify the impact as their assessment is still ongoing and (b) companies that are not significantly affected by Pillar Two but have not explicitly stated this.

Companies that disclose the estimated impact of Pillar Two income taxes generally either disclose the impact on the effective tax rate (ETR) (12%) or disclose the monetary impact (10%), while disclosure of both is rare (1%) as highlighted in Table 5.

Table 5.
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How companies disclose the impact of Pillar Two income taxes.

Method of quantifying impact % of companies
No quantification of impact 77
Quantification of impact on ETR 12
Quantification of monetary impact 10
Quantification of impact of ETR and monetary impact 1
100

Disclosures of the impact of Pillar Two income taxes are most useful when they describe a relatively narrow band of expected outcomes. Table 6 below illustrates how companies disclosed the expected impact of Pillar Two income taxes. To the extent that companies disclosed a monetary impact, this has been recalculated using their 2023 profits to an impact on their expected effective tax rate.2

Table 6.
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Disclosed range of impact relative to their effective tax rate.

Method of quantifying impact Number of companies %
Disclosed a point estimate 6 26%
Disclosed a narrow range (less than 1 percentage point of ETR) 10 44%
Disclosed a range of exactly 1 percentage point of ETR 4 17%
Disclosed a broad range (more than 1 percentage point of ETR) 3 13%
23 100%

Out of the 23 companies that quantify the expected impact of Pillar Two income taxes, 26% provided a point estimate of the impact, while 61% of the companies disclosed an estimated range of the impact (e.g. see Volkswagen, Figure 1) of 1% percentage point of ETR or less. Further, 13% of the companies disclosed an estimated range of more than 1%.

While it would have been ideal to forecast the level of future profits in order to quantify the potential impact of Pillar Two income taxes, the IASB clarified that entities are not expected to disclose information about possible future transactions and forward-looking information to meet the disclosure objective. This means that entities are not expected to forecast future profits, reflect mitigation actions they expect to take in future periods, or consider possible future changes in tax legislation. Considering the above guidance, it was not unexpected to note that only a handful of companies (3%) quantified the impact on a forward-looking basis.

2.3.2. Disclosure of qualitative information

Table 8 demonstrates that 55% of the companies in the population disclosed some form of qualitative information (such as information about how an entity analysed or assessed it is affected by Pillar Two legislation, the main jurisdictions in which exposures to Pillar Two income taxes might exist, reasons for low taxation in particular jurisdictions, etc) in their Pillar Two disclosure.

Table 7.
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Disclosure of the impact of Pillar Two income taxes on a forward-looking basis.

Forward-looking quantification of impact % of companies
No quantification of impact 77
Forward-looking quantification of impact 3
Quantification of impact which is not forward-looking 20
100
Table 8.
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Qualitative information disclosed.

% of companies
No qualitative disclosure 45
Mention qualitative information 55
100

Due to the novel concepts and complexity of the Pillar Two Rules, the constraints caused by the relatively late publication of guidance by the OECD and the speed with which the laws were being implemented by the countries – there were expectations that MNEs might be unable to provide quantified impact of Pillar Two in their disclosure and would resort to providing only qualitative information regarding their Pillar Two impact. This expectation seems to have been validated when the number of companies providing qualitative information as captured in Table 8 (55% of the companies) is compared to the number of companies which disclosed quantitative information of their Pillar Two impact as captured in Table 5 (23% of the companies).

2.3.3. Tax mechanisms disclosed and undisclosed future impact

The amendments to IAS 12 do not specifically require disclosure of the three different tax mechanisms under the Pillar Two model rules. Therefore, it is not unexpected that 82% of companies does not mention even a single tax mechanism in their financial statements. However, 14% of companies mentions QDMTT and a further 4% mentions both QDMTT and IIR. The UTPR (which takes effect in 2025) is not mentioned by any of the companies.

2.3.4. Application of the transitional safe harbour rules

To mitigate the administrative burden for MNEs in complying with the Pillar Two model rules during the initial years of implementation, the OECD developed the Transitional Safe Harbor Rules. Under the Transitional Safe Harbor Rules, the GloBE Information Return need not be completed in full for a jurisdiction. The top-up tax for such a jurisdiction is deemed to be zero, if the jurisdiction meets the conditions prescribed under the Transitional Safe Harbour Rules.

Table 10 illustrates that 20% of the companies explicitly mentions the safe harbour provisions in their Pillar Two disclosure.

The fact that UTPR is not mentioned by any of the companies in the population (refer Table 9) and the fact that 20% of companies mentions the transitional safe-harbour provisions in Pillar Two suggests that there is an additional Pillar Two impact that will only become apparent in future reporting periods once the UTPR becomes effective and the transitional safe harbour rules phase out.

Table 9.
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Pillar Two tax mechanisms mentioned.

Tax mechanism mentioned % of companies
No tax mechanism mentioned 82
Mention QDMTT 14
Mention QDMTT and IIR 4
100
Table 10.
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Disclosure explicitly mentioning Transitional Safe Harbour Rules.

% of companies
Transitional Safe Harbour Rules mentioned 20
Transitional Safe Harbour Rules not mentioned 80
100

2.3.5. Country analysis

Table 11 shows that 22% of companies mentions at least one country in describing the impact of Pillar Two income tax legislation. Six of the companies that mention one country describe a foreign jurisdiction, while four of the companies that mention one country describe their country of incorporation (Switzerland). Volkswagen Aktiengesellschaft mentions twenty-one countries in which it has an effective tax rate of less than 15%. The remaining 10% of companies mentions two to six countries. The fact that 71% (refer Table 4) of companies explicitly mentions that the impact of Pillar Two is not significant, is consistent with the results that 78% of the companies does not mention any countries where there might be a Pillar Two impact.

Table 11.
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Number of countries for which a Pillar Two impact is mentioned per company.

Number of countries mentioned % of companies
No countries mentioned 78
1 country 10
2 countries 4
3 countries 1
4 countries 3
5 countries 2
6 countries 1
21 countries 1
100

Table 12 shows that the top five countries mentioned were Switzerland, Ireland, Bulgaria, Hong Kong and United Arab Emirates. As noted earlier, four companies mentioning Switzerland are incorporated in the country itself and describe the tax regime that the parent entity is subject to, but this is not the case for Ireland, Bulgaria, Hong Kong and United Arab Emirates. While the companies do not disclose their exposure in individual jurisdictions, the analysis suggests that the impact of Pillar Two income taxes disproportionately relates to a limited number of countries.

Table 12.
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Frequency of disclosure and nature countries that are mentioned by name.

Country OECD income group Number of companies If countries are disclosed, percentage of companies that mentions the country
Switzerland Investment hub 10 45%
Ireland Investment hub 7 32%
Bulgaria Upper middle income 4 18%
Hong Kong Investment hub 4 18%
United Arab Emirates High income 4 18%
Bermuda Investment hub 3 14%
Singapore Investment hub 2 9%
France High income 2 9%
China Upper middle income 2 9%
Bosnia and Herzegovina Upper middle income 2 9%
Belgium, Brazil, Cayman Islands, Estonia, Finland, Hungary, Italy, Kosovo, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Netherlands, North Macedonia, Norway, Oman, Pakistan, Panama, Qatar, Saudi Arabia, Serbia, Tanzania, Thailand, Turkey, UK, US 1 5%

The OECD (2024) identifies five jurisdiction groups (high income, upper middle income, lower middle income, low income, and investment hub). Investment hubs are generally defined as jurisdictions with a total inward foreign direct investment position above 150% of GDP on average across 2017–2020. While the investment hub group countries represent 11% of all jurisdictions identified by the OECD, they represent half of the countries mentioned at least twice in Table 12. The low-income countries are not mentioned at all, while only two out of 50 lower middle income countries are mentioned.

2.3.6. Sources of information used

As noted in Table 13, 36% of companies discloses which type of information they used in estimating the impact of Pillar Two income tax, with some companies disclosing multiple sources of information. Financial statements and country-by-country reporting were mentioned by 13% of companies. To the extent disclosed, this type of information related to 2022 and 2023. The category ‘Other’ refers to a wide range of different sources, but notably also includes projections, forecasts, and simulations for 2024.

Table 13.
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Information used as the basis for the impact assessment.

% of companies Yes No
Does the entity describe the information used as the basis for its assessment? 36% 64%
– Financial statements 13%
– Tax filings 4%
– Country-by-country reporting 13%
– Other 21%
Table 14.
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Location of Pillar Two income tax disclosures.

% of companies Yes No
Does the company mention Pillar Two in the financial statements 100% 0%
Does the company also mention Pillar Two elsewhere in the annual report? 24% 76%
Does the audit report mention income taxes? 20% 80%
Does the audit report mention Pillar Two income tax? 1% 99%
Table 15.
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Status of the Pillar Two income tax assessment.

Status of the Pillar Two income tax assessment % of companies Percentage of companies expecting the impact to be not significant
Not mentioned 45 80%
Ongoing 30 73%
Completed 25 64%
100

2.3.7. Placement of Pillar Two income tax disclosures

All companies mention Pillar Two income taxes in their IFRS financial statements. 24% of companies also mentions Pillar Two income taxes elsewhere in their annual report, but those disclosures are found in a wide range of different sections of the annual report, such as the directors’ report, audit committee report, corporate governance report, risk management section, and audit report.

The audit reports on 20% of companies mention income taxes (usually as a key audit matter), but only the audit report of one company mentioned Pillar Two. Therefore, Pillar Two income taxes do not appear to have been a significant audit concern in the 2023 financial statements.

2.3.8. Status of impact analysis

Almost half of the companies (45%) does not explicitly disclose information about the status of their Pillar Two impact assessment and 80% of those companies does not expect the impact of Pillar Two to be significant. However, 73% of companies that disclose that their impact assessment is ongoing states that the impact is expected to be insignificant, while only 64% of companies that have completed their impact assessment states that the impact is insignificant. It is possible that the companies most affected by Pillar Two are also most advanced in their impact analysis, but it cannot be ruled out that companies that do not disclose the status of their impact analysis have undisclosed or unidentified Pillar Two exposures.

2.3.9. Relationship between disclosed impact and ETR

In Table 16, companies have been grouped by their effective tax rate as determined under IFRS. Companies with a relatively low net profit, but that comprise both profitable and loss-making subsidiaries, may report very high (i.e. 30% or more) or very low (i.e. 10% or less) effective tax rates due to compositional effects. Therefore, it is not possible to interpret the relationship between effective tax rate and Pillar Two impact disclosure for those groups in a meaningful manner.

Table 16.
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Relationship between effective tax rate and Pillar Two impact disclosure.

IFRS effective tax rate Total number of companies Number of companies not expecting a significant impact Percentage of companies not expecting a significant impact
(a) (b) (b)/(a)
10% or less 8 7 88%
10%–15% 5 3 60%
15%–20% 15 5 33%
20–25% 28 21 75%
25–30% 26 22 85%
30% or more 18 13 72%
100 71 71%

Only 33% of companies with an effective tax rate under IFRS in the 15%–20% bucket states that they do not expect a significant impact of the Pillar Two tax legislation. One reason for this could be that the effective tax rate as determined under Pillar Two tax legislation is not necessarily the same as the effective tax rate as determined under IFRS. A second reason could be that some groups comprise a mix of low-taxed and high-taxed entities, which is consistent with the finding that 25% of companies in the 20%–25% bucket expects a significant impact despite having an effective tax rate under IFRS that is clearly higher than 15% minimum tax rate. To the extent that the second reason applies and is the result of prior tax optimisation strategies, the companies affected might be incentivised to reconsider those arrangements.

2.3.10. OECD budgeted impact and country information

The most recent estimate of the OECD (2024) is that the expected global minimum tax (GMT) revenue will increase global corporate income tax revenue by USD 155–192 billion/year, or between 6.5% and 8.1% of current global corporate income tax revenue. The International Monetary Fund (IMF) (2023) estimates that Pillar Two would raise global corporate income tax revenue by 5.7%, before any behavioural responses by companies. The relative impact on the subgroup of companies that are within the scope of Pillar Two is more pronounced than the percentages published by the OECD and IMF suggest at first sight, as those percentages compare the expected Pillar Two revenue from the subgroup to the current global income tax revenue derived from all companies. This effect could not be quantified, and no adjustments have been made in the calculations below, but for the purposes of the analysis it should be kept in mind that the OECD and IMF percentages understate the impact on MNEs.

The median IFRS effective tax rate of our population is 23.7% and the median IFRS effective tax rate of companies that quantify the effect of Pillar Two income taxes is 23.8%. If the OECD’s estimated increase in corporate income tax revenue of 6.5% to 8.1% were applied to the median IFRS effective tax rate of our population, it would suggest an approximate increase of the IFRS effective tax rate by 1.5 to 1.9 percentage points. Similarly, the IMF estimate would correspond to an increase of the IFRS effective tax rate by 1.4 percentage points.

As illustrated in Table 17, only 11% of the companies in our population discloses an expected ETR effect of more than 0.5 percentage points, while 12% of the companies discloses an ETR effect of 0.5 percentage point or less and 69% of the companies explicitly state that the impact is not significant. It is interesting to note that only 10% of the companies discloses an ETR impact at levels that correspond to the OECD’s expectations.

Table 17.
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Expected effect of Pillar Two income taxes.

% of companies
Disclose quantitative impact (midpoint of expected range)
Expected increase in ETR between 0.00% and 0.50% 12
Expected increase in ETR between 0.51% and 1.00% 1
Expected increase in ETR between 1.01% and 1.50% 4
Expected increase in ETR between 1.51% and 3.00% 5
Expected increase in ETR more than 3.00% 1
23
No quantitative disclosure of impact
Companies stating that the impact of Pillar Two income taxes is not significant, but that did not quantify the impact 69
Companies not disclosing or quantifying whether the impact of Pillar Two income taxes is significant 8
77
100

Companies in our population generally expect a significantly smaller impact of the Pillar Two income taxes than the OECD and IMF. One reason could be that companies have not fully considered the impact of the UTPR and the temporary nature of the safe harbour exceptions, as evidenced by the very limited disclosures on these topics. A second reason could be that companies’ assessments are either incomplete and do not identify all exposures, or that they already anticipate behavioural changes that might mitigate the impact. A third reason could be that our population is not representative of companies in general or that a large portion of the Pillar Two revenue will be derived from companies that are somehow extreme outliers. Finally, it is possible that the high-level estimates of the OECD and IMF, which are based on highly aggregated data from several years ago, do not fully consider implementation details that might reduce the total Pillar Two revenue.

It should be noted that there is some indication that countries that have implemented Pillar Two tax legislation typically only expect an increase in corporate income tax revenue of 2% to 4%3 which, if applied to the median IFRS effective tax rate of our population, would suggest an approximate increase of the IFRS effective tax rate by 0.5 to 0.9 percentage points. Even those much lower estimates of the expected Pillar Two revenue may suggest there is a risk that companies have not fully considered the impact of the UTPR and the temporary nature of the safe harbour rules or that they have not yet identified all Pillar Two impacts. However, it is only after the Pillar Two legislation becomes fully effective (including UTPR and phase out of transitional safe harbour rules) that we will see whether the increase in corporate income tax revenues will be closer to that estimated by the countries, OECD, or by the companies themselves.

2.4. Illustrations of comprehensive Pillar Two disclosure

We have provided a couple of illustrative Pillar Two disclosures made by companies in their annual report which provided comprehensive insights for the readers of the financial statements. Figure 1 provides an illustration of the type of information that is provided in the more detailed company disclosures.

Figure 1.

Illustration of a detailed Pillar Two disclosure by Volkswagen AG.

Figure 2 provides an illustration of a detailed impact assessment that considers the impact for the entire period from 2024 to 2026 (i.e., the years where the Transitional Safe Harbour Rules are operative).

Figure 2.

Illustration of a detailed Pillar Two disclosure by Nordea Bank ABP.

3. Concluding remarks

The implementation of the Pillar Two Rules has produced a change which is not only permanent but also extremely complex in how MNE groups are taxed globally. Consequently, it also substantially changes the manner of accounting and disclosing the impact of Pillar Two in the financial statements.

This article provides an overview of the impact of the introduction of Pillar Two income tax legislation on the financial statements of 100 large listed European companies, based on their 2023 annual reports. The research shows that a large majority of the companies states that the impact of Pillar Two income taxes is not expected to be significant. However, there are indications that the full Pillar Two impact on these companies will only become apparent in future reporting periods once the UTPR also becomes effective and the relief under the transitional safe harbours phase out.

Given the conceptual novelty and complexity of Pillar Two model rules, the exception for Pillar Two deferred tax accounting in IAS 12 and the additional disclosure requirements introduced by IASB are welcome and ensure consistency. However, the disclosure requirements for the periods in which legislation is enacted or substantively enacted but not yet in effect leaves a lot to judgement by the companies and their auditors, as evidenced by the wide range of disclosure practices identified. Some companies have provided comprehensive insights as to how Pillar Two will affect their operations and others have offered only cursory mentions, with minimal elaboration on the potential impacts. The varied degree of detail in the Pillar Two disclosures underscores the evolving nature of corporate reporting in response to new tax regulations. Nevertheless, the guidance provided by the IASB at least raises awareness regarding the direction of travel of the disclosure and reduces inconsistencies to a large extent.

While the transitional disclosure requirements regarding the impact of (substantively) enacted Pillar Two legislation that is not yet in effect will no longer apply in the future, companies will continue to be required to disclose the current tax expense related to Pillar Two income taxes. This allows users of financial statement to monitor the impact of the Pillar Two income taxes and, for example, the impacts of the UTPR and the phase out of the safe harbour rules.

P. Dekker – Pieter is partner in the Professional Practice Group and IFRS Desk of EY Accountants B.V. in Amsterdam, The Netherlands.

M. Kriek – Marcel is a Senior Director Tax Accounting Services at PricewaterhouseCoopers Belastingadviseurs N.V. in Rotterdam, The Netherlands.

Acknowledgements

The authors would like to thank Rozanne D’Alessandro (EY), Avinash Karuvelil (EY) and Manish Shanthilal (PwC) for their contribution to the empirical research.

Notes

1

As per Article 1.3 of the OECD Pillar Two Model Rules, a Constituent Entity is defined as (a) any Entity that is included in a Group; and (b) any Permanent Establishment of a Main Entity that is within paragraph (a).
2

There were six companies that disclosed monetary impact in terms of low, medium or high double digit million euros or single digit million euros. There does not exist a formal definition of these terms, but for the purpose of recalculating the impact of Pillar Two income taxes on the ETR, we have considered the informal definitions that low double digits range from 10 to 30, medium double digits range from 31~60, and high double digits range from 61 to 99.
3

Tax Foundation, Select Country-Level Revenue Estimates for Pillar Two, www.taxfoundation.org/blog/pillar-two-corporate-tax-revenue-estimate-by-country.

References

  • Hugger F, González Cabral AC, Bucci M, Gesualdo M, O’Reilly P (2024) The Global Minimum Tax and the taxation of MNE profit. OECD Taxation Working Papers, No. 68, OECD Publishing, Paris, 86 pp. https://doi.org/10.1787/9a815d6b-en
  • OECD (2021) Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/782bac33-en

Appendix 1

Table A1.
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The 2023 annual reports (management report and financial statements, including auditor reports) of the following 100 companies have been included in this research.

Company Country Sector
adidas AG Germany Consumer Non-Durables
Adyen N.V. Netherlands Technology Services
Airbus SE Netherlands Electronic Technology
Alcon Inc Switzerland Health Technology
Allianz SE Germany Finance
Anheuser-Busch InBev NV/SA Belgium Consumer Non-Durables
ASML Holding NV Netherlands Electronic Technology
Atlas Copco AB Sweden Producer Manufacturing
AtraZeneca PLC UK Health Technology
AXA France Finance
BAE Systems plc UK Electronic Technology
Banco Bilba Vizcaya Argentaria, S.A. Spain Finance
Banco Santander, S.A. Spain Finance
BASF SE Germany Process Industries
Bayerische Motoren Werke Aktiengesellschaft Germany Consumer Durables
BNP Paribas SA France Finance
BP p.l.c. UK Energy Minerals
British American Tobacco p.l.c. UK Consumer Non-Durables
CaixaBank, S.A. Spain Finance
Capgemini SE France Technology Services
Christian Dior SE France Consumer Non-Durables
Compagnie de Saint-Gobain France Producer Manufacturing
Compass Group PLC UK Consumer Services
CRÉDIT AGRICOLE GROUP France Finance
CRH plc Ireland Non-Energy Minerals
Daimler Truck Holding AG Germany Consumer Durables
Danone France Consumer Non-Durables
Dassault Systèmes S.E. France Technology Services
Deutsche Börse Aktiengesellschaft Germany Finance
Deutsche Post AG Germany Transportation
Deutsche Telekom AG Germany Communications
Diageo plc UK Consumer Non-Durables
Dr. Ing. h.c. F. Porsche Aktiengesellschaft Germany Consumer Durables
Enel SpA Italy Utilities
Engie France Utilities
Eni SpA Italy Energy Minerals
Equinor ASA Norway Energy Minerals
EssilorLuxottica France Health Technology
EQT AB Sweden Finance
Experial PLC UK Commercial Services
Ferrari N.V. Netherlands Consumer Durables
Generali Group Italy Finance
Givaudan SA Switzerland Consumer Non-Durables
Glencore plc Jersey Distribution Services
GSK Plc UK Health Technology
Haleon plc UK Distribution Services
Heineken N.V. Netherlands Consumer Non-Durables
Hermès International France Consumer Non-Durables
Holcim Ltd Switzerland Non-Energy Minerals
HSBC Holdings plc UK Finance
Iberdrola, S.A. Spain Utilities
Industria de Diseño Textil, S.A. Spain Retail Trade
Infineon Technologies AG Germany Electronic Technology
ING Groep N.V. Netherlands Finance
Intesa Sanpaolo Group Italy Finance
Investor AB (publ) Sweden Finance
Kering France Non-Energy Minerals
L’Air Liquide S.A. France Process Industries
Lloyds Banking Group plc UK Finance
London Stock Exchange Group plc UK Technology Services
Lonza Group Ltd Switzerland Health Technology
L’Oréal France Consumer Non-Durables
LVMH Moët Hennessy Louis Vuitton SE France Consumer Non-Durables
Mercedes-Benz Group AG Germany Consumer Durables
Merck Kommanditgesellschaft auf Aktien Germany Health Technology
Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft Germany Finance
National Grid plc UK Utilities
Nestlé S.A. Switzerland Consumer Non-Durables
Nordea Bank Abp Finland Finance
Novartis AG Switzerland Health Technology
Novo Nordisk A/S Denmark Health Technology
Partner Group Holding AG Switzerland Finance
Pernod Ricard S.A. France Consumer Non-Durables
Prosus N.V. Netherlands Transportation
Reckitt Benckiser Group plc UK Consumer Non-Durables
RELX PLC UK Commercial Services
Richemont Switzerland Consumer Durables
Rio Tinto plc UK Non-Energy Minerals
Roche Holding Ltd Switzerland Health Technology
Rolls Royce Holding plc UK Electronic Technology
Safran SA France Electronic Technology
Sanofi France Health Technology
SAP SE Germany Technology Services
Schneider Electric SE France Producer Manufacturing
Shell plc UK Energy Minerals
Siemens Aktiengesellschaft Germany Producer Manufacturing
Siemens Healthineers AG Germany Health Services
Sika AG Switzerland Process Industries
Stellantis N.V. Netherlands Consumer Durables
STMicroelectronics N.V. Netherlands Electronic Technology
TotalEnergies SE France Energy Minerals
UBS Group AG Switzerland Finance
UniCredit Group Italy Finance
Unilever PLC UK Consumer Non-Durables
Universal Music Group N.V. Netherlands Commercial Services
Vinci France Industrial Services
VOLKSWAGEN AKTIENGESELLSCHAFT Germany Consumer Durables
Volvo AB Sweden Producer Manufacturing
Wolters Kluwer Netherlands Technology Services
Zurich Insurance Group Ltd Switzerland Finance
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