Corporate Accountants Must Plan Now for Bevy of Pillar Two Laws

As countries around the world adopt legislation to implement the 15% global minimum tax known as Pillar Two, tax accounting will become even more complex.

A country’s legislation will greatly affect multinational companies and pose numerous pitfalls based on sheer complexity and volume. Proactive planning and analysis will avoid problems down the road.

Here are a few areas to consider in tax accounting when dealing with Pillar Two legislation.

Know your team and members’ skill sets. With detailed and varied legislation, tax leaders must determine that those focusing on Pillar Two have institutional knowledge to grasp nuances of the work.

Only a small fraction of US tax professionals have a solid working knowledge of Pillar Two rules. Of that group, there’s an even smaller group who are experts in accounting rules of Accounting Standards Codification 740. Affected organizations can help themselves by developing cross-functional teams and ultimately bring required skills to the Pillar Two table.

Tax accounting aspects of Pillar Two largely involve two components, each with complexities and decision points. The first is how information from the tax provision feeds into the Pillar Two calculations. The second is how the completed Pillar Two calculations feed back into the tax provision.

Within each component, there are elections to make and potential pitfalls to avoid. For many companies, Pillar Two won’t create significant tax liabilities but instead will act as a substantial compliance exercise. Various calculation decision points can affect competing priorities between simplification, liability minimization, and reducing volatility in the effective tax rate.

Examine pros and cons of two long-lived deferred tax liability approaches. One of the main components of Pillar Two calculation is adjusted covered taxes, which include both current and deferred taxes. The starting point for adjusted current taxes is current taxes, per the financial statements.

However, Pillar Two requires companies to make numerous adjustments to the adjusted covered taxes, including removing accruals for uncertain tax positions, adjusting for qualified and nonqualified tax credits, and adjusting for net gains and losses, among others.

Companies should home in on the adjustment to remove current taxes on excluded income items. Various items of income are removed from the calculation of Global Anti-Base Erosion Income or Loss. The taxes associated with these items must be excluded from adjusted covered taxes.

There’s no guidance on how to allocate tax expense to these items. One method that may help, pending further guidance, is to apply the intraperiod allocation rules in ASC 740-20.

As with current taxes, companies must calculate the amount of deferred tax expense or benefit included in adjusted covered taxes. The starting point is deferred tax expense or benefit from the financial statements.

Then, various adjustments are made, such as excluding the creation or release of valuation allowances, removing the effects of changes in tax rates, and recalculating net operating losses under the GloBE rules. One of the more challenging adjustments relates to deferred tax liabilities, or DTLs, with a life of more than five years.

While there are some exceptions, such as fixed assets, most DTLs that don’t reverse within five years of origination must be recaptured by recalculating covered taxes for the originating year. Conversely, companies can make an election in the year of origination to exclude DTLs not expected to reverse within the five-year period.

This election presents companies with a choice. They can follow recapture rules, which could help their organization depending on the jurisdiction involved. But electing the exclusion may reduce the burden of manually tracking DTLs and subsequently performing recapture calculations.

As a result, companies without an expected cash liability may prefer to make the election for administrative ease, while companies expecting meaningful liability under Pillar Two may prefer the cash tax timing benefit over a reduced administrative burden.

Explore the impacts of the accounting policy election in terms of valuation allowance. A company’s Pillar Two calculations feed back into the tax provision, creating a variety of ramifications and choices.

The initial accounting is straightforward. The Financial Accounting Standards Board has specified that the alternative minimum tax model will be followed, meaning there is an inclusion period for any liability.

However, there can be other complications around intraperiod allocations and between annualized-versus-discrete items at interim periods. Companies also should note any uncertain tax positions related to Pillar Two exposure.

The valuation allowance analysis on deferred tax assets also shouldn’t be overlooked. While they’re carried at regular tax rates, they may reverse in years that result in a Pillar Two inclusion.

In that case, they don’t generate the tax benefit otherwise expected. Although FASB hasn’t issued direct guidance, the previous alternative minimum tax considerations guidance can be helpful for these instances.

Following that guidance, companies generally should make an accounting policy election on whether to consider Pillar Two effects in their valuation allowance analysis. Electing this could be more time- and resource-consuming, though it might also create less tax rate volatility in certain situations.

There are several policy choices and approaches that affected organizations should consider when wading through tax accounting considerations for Pillar Two. Preparation is key. Taking the time to assess your teams, examining the pros and cons of various approaches, and proactively exploring the impacts of accounting policy on the organization can avoid challenges later.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Phil Laminack is CPA and director of tax accounting services at Forvis Mazars.

Write for Us: Author Guidelines