February 2, 2023
Accounting for the global minimum tax under the OECD's Pillar Two Global Anti-Base Erosion model rules
The Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting addresses the tax challenges arising from the digitalization of the global economy and aims to restore confidence in the international tax system by determining that profits are taxed where economic activities take place and value is created.
To that end, the OECD released Pillar Two Global Anti-Base Erosion (GloBE) model rules for a global minimum tax that is intended to apply to multinational enterprises (MNEs) with revenue greater than EUR750 million in their consolidated financial statements. The GloBE rules must be implemented by individual jurisdictions before they can take effect and therefore require local legislation to be enacted. OECD member countries are expected to enact GloBE rules in 2023 with an effective date of 1 January 2024.
On 31 December 2022, South Korea became the first country to enact legislation to implement a global minimum tax aligning with the GloBE rules. The law will be effective for fiscal years beginning on or after 1 January 2024.
At the FASB meeting on February 1, 2023, the FASB staff responded to a technical inquiry about whether an entity should record deferred taxes for the GloBE minimum tax by recognizing GloBE-specific deferred taxes or remeasuring existing deferred taxes at the GloBE minimum tax rate. The staff stated its belief that the GloBE minimum tax as illustrated in the inquiry is an alternative minimum tax as discussed in ASC 740, so deferred tax assets and liabilities would not be recognized or adjusted for the estimated future effects of the minimum tax. The FASB staff believes ASC 740-10-30-10 and 30-12 and ASC 740-10-55-31 and 55-32 support this conclusion. The GloBE minimum tax should be viewed as a separate but parallel tax system that is imposed to make certain taxpayers pay at least a minimum amount of income tax.
MNEs need to monitor the developments related to the enactment of the GloBE rules in all of the jurisdictions where they operate either through wholly- or partially-owned subsidiaries, joint ventures, flow-through entities or permanent establishments. Because a country will need to enact tax laws to implement the GloBE rules, entities will need to evaluate provisions of laws enacted in each jurisdiction to determine whether they are consistent with the OECD's model rules in order to apply the accounting indicated by the view of the FASB staff.
A summary of the FASB staff's discussion can be found here. For more information about the GloBE rules and the accounting implications for entities that will be subject to them, see our upcoming Technical Line.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor