BEPS 2.0 Impact on Financial Statement Audits

What Pillar Two actually requires

The OECD’s GloBE Model Rules (published December 2021, with subsequent Administrative Guidance in February 2023, July 2023, and December 2023) impose a minimum effective tax rate of 15% on multinational enterprise (MNE) groups with annual consolidated revenue of €750M or more in at least two of the four preceding fiscal years. The threshold is measured using the group’s consolidated financial statements, not local tax filings.

If a constituent entity in a jurisdiction has a GloBE effective tax rate below 15%, a top-up tax is due. The top-up tax equals the difference between the 15% minimum rate and the jurisdictional ETR, multiplied by the excess profit (GloBE income minus a substance-based income exclusion for payroll and tangible assets). The calculation is performed jurisdiction by jurisdiction, not entity by entity.

Two things make this different from a standard tax provision.

First, the income base for the GloBE ETR uses the financial accounting income from the consolidated financial statements, with specific adjustments (stock-based compensation, policy elections for fair value gains, intercompany transactions). This is not the taxable income from the local tax return. Second, the tax base includes “covered taxes” which are the taxes recorded in the financial statements attributable to GloBE income. Deferred tax adjustments are included, subject to specific caps and exclusions. The gap between the local tax ETR and the GloBE ETR can be significant, and it catches finance teams who assume their statutory rate analysis is sufficient.

Countries implement Pillar Two through domestic legislation. The EU adopted the Minimum Tax Directive (Council Directive 2022/2523) in December 2022, requiring member states to transpose the Income Inclusion Rule (IIR) by 31 December 2023 and the Undertaxed Profits Rule (UTPR) by 31 December 2024. The Netherlands transposed on time (Wet minimumbelasting 2024). Germany, France, and most major EU economies also transposed by the deadline. Non-EU jurisdictions vary: the UK enacted its rules effective 31 December 2023, while others are still in progress.

The IAS 12 amendments: what changed for your audit file

The IASB issued amendments to IAS 12 in May 2023 titled “International Tax Reform: Pillar Two Model Rules.” These amendments introduced two changes that directly affect your audit procedures.

The first is the mandatory temporary exception from recognising and disclosing deferred tax assets and liabilities related to Pillar Two top-up taxes. IAS 12.4A requires entities to apply this exception. It is not optional. This means you don’t audit deferred tax on Pillar Two. The rationale: the GloBE rules create a fundamentally different type of tax obligation that doesn’t fit the IAS 12 deferred tax framework, and the IASB decided that requiring deferred tax recognition would produce misleading information.

The second change is a new disclosure requirement. IAS 12.88A requires entities within scope of Pillar Two legislation to disclose that they have applied the exception, and to disclose their current tax expense related to Pillar Two top-up taxes. Additionally, IAS 12.88B requires qualitative and quantitative information about the entity’s exposure to Pillar Two, including the jurisdictions where the GloBE ETR is below 15% and the entity’s assessment of its exposure. In periods where legislation has been enacted or substantively enacted but the top-up tax is not yet in effect, the entity must disclose known or reasonably estimable exposure information.

For your audit file, this means two concrete things. First, verify that the entity has applied the deferred tax exception. If the entity has recognised deferred tax on Pillar Two income, that’s an error. Second, test the adequacy of the disclosures under IAS 12.88A and 88B. The disclosure requirements are specific: jurisdictions below 15%, the GloBE ETR by jurisdiction (or a statement that the information is not yet available), and the basis for the entity’s exposure assessment. A generic statement like “the group is assessing its Pillar Two exposure” is insufficient if legislation has already been enacted.

How to audit the top-up tax provision under ISA 540

The top-up tax is a current tax liability, not a deferred tax item. Audit it as an accounting estimate under ISA 540.13. The estimation uncertainty sits in the GloBE income calculation, the covered taxes calculation, and the substance-based income exclusion.

Start with scope. Confirm that the group meets the €750M revenue threshold by checking the consolidated revenue in the two of four preceding years test. This is a factual question with a binary answer, but finance teams sometimes use different revenue definitions (IFRS revenue versus total income) or exclude discontinued operations incorrectly.

Then test the GloBE ETR by jurisdiction. Obtain the group’s Pillar Two calculations and trace the inputs. GloBE income starts with the net income per the financial statements for each jurisdiction, then applies the adjustments in Articles 3.2.1 through 3.2.13 of the GloBE Model Rules. The most common adjustments involve excluded dividends, excluded equity gains or losses, stock-based compensation (where the entity may elect between the financial accounting expense and the tax-deductible amount), and asymmetric foreign currency gains and losses. Each adjustment should be traceable to the consolidated reporting package for that jurisdiction.

Covered taxes are the current tax expense plus deferred tax adjustments, subject to the rules in Articles 4.1 through 4.4. The key audit risk is that the entity includes taxes that don’t qualify as covered taxes (withholding taxes borne by other group entities, taxes on income that isn’t GloBE income) or excludes deferred tax adjustments that should be included.

The substance-based income exclusion (SBIE) reduces the excess profit by 5% of the carrying value of eligible tangible assets and 5% of eligible payroll costs in each jurisdiction. These percentages are subject to transitional rates that are higher in the initial years (8% for tangible assets and 10% for payroll in 2024, declining to 5% by 2033). Test the asset and payroll figures used in the SBIE against the local entity financial statements and the consolidated reporting package.

ISA 540.18 applies: test management’s process, evaluate key assumptions, and assess the sensitivity of the top-up tax to changes in the GloBE ETR inputs. For jurisdictions with an ETR near 15% (say, between 13% and 17%), small changes in the GloBE income or covered taxes can flip the jurisdiction from above to below the threshold. Quantify that sensitivity.

Transitional safe harbours and how to test them

The OECD’s Administrative Guidance (July 2023) introduced transitional Country-by-Country Report (CbCR) safe harbours that allow MNEs to set the top-up tax to zero for a jurisdiction if certain conditions are met, using data from qualified CbCR filings. The safe harbours apply for fiscal years beginning on or before 31 December 2026 and ending before 30 June 2028.

A jurisdiction qualifies for the safe harbour under one of the following tests. First, the de minimis test: the jurisdiction has total revenue below €10M and profit before tax below €1M (based on qualified CbCR data). Second, the simplified ETR test: the jurisdiction has a simplified ETR (total tax charge from the CbCR divided by profit before tax from the CbCR) at or above a transition rate (15% for fiscal years beginning in 2024 and 2025, rising to 16% for 2026). Finally, the routine profits test: the profit before tax is equal to or less than the SBIE amount for that jurisdiction.

For your audit, the safe harbour is attractive because it reduces the top-up tax to zero without requiring the full GloBE calculation. But the inputs must be from a “qualified” CbCR, which means the CbCR was filed with the tax authority of the ultimate parent entity and meets specific data quality requirements. Verify that the CbCR data reconciles to the financial statements (or to the consolidated reporting package, depending on the entity’s CbCR preparation methodology) and that the jurisdiction passes at least one of the tests.

The risk is over-reliance on the safe harbour. If the entity claims the safe harbour but the CbCR data doesn’t meet the “qualified” criteria (because it was prepared on a different basis than the financial statements, or because certain adjustments weren’t made), the safe harbour doesn’t apply and the full GloBE calculation is required. Document your assessment of whether the CbCR qualifies, not just whether the numeric test is met.

ISA 250 and local implementing legislation

Pillar Two creates a new compliance dimension. ISA 250.14 requires you to obtain sufficient appropriate audit evidence regarding compliance with laws and regulations that have a direct effect on the financial statements. Local Pillar Two legislation (the Wet minimumbelasting 2024 in the Netherlands, for example) directly affects the determination of the tax provision. Non-compliance can result in penalties, interest, and in some jurisdictions, director liability.

Your procedures under ISA 250 should verify that the entity has identified which jurisdictions have enacted Pillar Two legislation, that filing obligations are understood (the GloBE Information Return is due within 15 months of the end of the fiscal year, extended to 18 months for the first year), and that the entity has a process for monitoring legislative developments in jurisdictions where it operates. For a group with subsidiaries in 12 jurisdictions, this is not a trivial exercise. The entity needs a register of implementation status by jurisdiction, and your audit file should evidence that you’ve reviewed it.

If the entity hasn’t filed the required GloBE Information Return, or if its top-up tax calculation omits a jurisdiction where legislation has been enacted, ISA 250.19 requires you to consider the effect on the financial statements. The omitted top-up tax is a potential misstatement. The unfiled return may create a penalty exposure that requires disclosure or provisioning.

Worked example: auditing a Dutch multinational group

Client: Dekker Precision Components N.V., a Dutch-headquartered MNE group manufacturing high-precision parts for the automotive and aerospace sectors. Consolidated revenue: €920M. Subsidiaries in the Netherlands (parent), Germany, Hungary, Singapore, and Mexico. Reports under IFRS. The group’s tax team has prepared a Pillar Two calculation using an external advisor’s model.

1. Confirm scope and verify the deferred tax exception

Consolidated revenue exceeded €750M in each of the last four fiscal years. The group is in scope. Check the financial statements for any deferred tax recognised on Pillar Two income. The entity has correctly applied the IAS 12.4A exception. No deferred tax has been recognised.

2. Obtain the GloBE calculations and test the ETR by jurisdiction

The group’s Pillar Two model shows the following jurisdictional ETRs: Netherlands 25.1%, Germany 29.3%, Hungary 11.8%, Singapore 14.2%, Mexico 22.5%. Hungary and Singapore are below 15%.

For Hungary (statutory rate 9%, effective GloBE ETR 11.8%): trace GloBE income to the Hungarian subsidiary’s reporting package. The main adjustment is a stock-based compensation add-back of €1.4M (the entity elected the financial accounting expense under Article 3.2.3). Covered taxes: current tax of €890K plus a deferred tax adjustment of €210K. GloBE income: €9.3M. ETR: €1.1M / €9.3M = 11.8%.

For Singapore (statutory rate 17%, effective GloBE ETR 14.2%): the ETR drops below 15% because the subsidiary has a tax holiday on qualifying income that reduces covered taxes. Trace the tax holiday terms to the approval letter from the Singapore Economic Development Board. GloBE income: €12.8M. Covered taxes: €1.82M. ETR: 14.2%.

3. Calculate the top-up tax

Hungary: excess profit = GloBE income (€9.3M) minus SBIE (5% of €4.1M tangible assets = €205K, plus 5% of €2.8M payroll = €140K; total SBIE = €345K). Using the 2024 transitional rates (8% tangible assets, 10% payroll): €328K + €280K = €608K. Excess profit = €9.3M minus €608K = €8.69M. Top-up tax percentage: 15% minus 11.8% = 3.2%. Top-up tax: €8.69M × 3.2% = €278K.

Singapore: excess profit = €12.8M minus SBIE of €1.12M (transitional rates applied to €7.2M tangible assets and €5.6M payroll). Excess profit = €11.68M. Top-up tax percentage: 0.8%. Top-up tax: €93K.

Total group top-up tax: €371K. The entity’s calculation shows €365K due to a rounding difference in the SBIE. The €6K difference is below the clearly trivial threshold. Agree.

4. Evaluate transitional safe harbour applicability

Mexico qualifies for the simplified ETR safe harbour: CbCR shows ETR of 22.5%, above the 15% transition rate. Germany and Netherlands also qualify. Test that the CbCR is “qualified” by verifying it was filed with the Dutch tax authority and that the revenue and profit figures reconcile to the consolidated reporting package within acceptable tolerances.

Hungary and Singapore do not qualify for the de minimis test (revenue exceeds €10M for both) or the simplified ETR test (both below 15%). Full GloBE calculation required for these two jurisdictions, which was performed in step 2.

5. Test disclosures under IAS 12.88A and 88B

Verify that the notes disclose: application of the deferred tax exception, the current tax expense related to Pillar Two (€371K), the jurisdictions where the GloBE ETR is below 15% (Hungary 11.8%, Singapore 14.2%), and the basis for the exposure assessment. The entity has included this in Note 8 (Income Taxes). The disclosure is adequate.

A reviewer examining this file sees a scope confirmation, a jurisdiction-by-jurisdiction ETR analysis with traced inputs, a quantified top-up tax with SBIE calculations, a safe harbour assessment with CbCR reconciliation, and a disclosure review tied to specific IAS 12 paragraphs.

Practical checklist for Pillar Two audit procedures

1. Confirm whether the group meets the €750M consolidated revenue threshold in at least two of the four preceding fiscal years. If the group is close to the threshold, test the revenue definition used (IFRS 15 revenue versus total income, treatment of discontinued operations).
2. Verify that the entity has applied the mandatory deferred tax exception under IAS 12.4A. If any deferred tax has been recognised on Pillar Two income, raise it as a misstatement.
3. Obtain the group’s GloBE ETR calculation for every jurisdiction where the group has constituent entities. For jurisdictions below 15%, trace GloBE income to the reporting package and covered taxes to the tax provision. Document each material adjustment (ISA 540.18).
4. Test the substance-based income exclusion using the correct transitional rates for the fiscal year. Trace eligible tangible assets and payroll costs to the local entity financial data.
5. For jurisdictions where the entity claims the transitional CbCR safe harbour, verify that the CbCR qualifies (filed with the parent jurisdiction tax authority, data reconciles to the financial statements or consolidated reporting package) and that at least one of the safe harbour tests is met.
6. Review the IAS 12.88A and 88B disclosures for completeness: application of the exception stated, current Pillar Two tax expense quantified, below-15% jurisdictions identified, and exposure basis explained.

Common mistakes

• Accepting the entity’s assertion that it’s “not affected” because all statutory tax rates exceed 15%. The GloBE ETR uses a different income and tax base than the statutory rate. Tax holidays, stock-based compensation adjustments, and timing differences on deferred tax all push the GloBE ETR away from the statutory rate. The OECD’s own impact assessment estimated that approximately 15% of in-scope MNEs would owe top-up tax in jurisdictions where the statutory rate exceeds 15%.
• Omitting the IAS 12.88B disclosures when the entity pays no top-up tax. The disclosure requirements apply to all in-scope entities, not just those with a liability. Even if every jurisdiction is above 15%, the entity must disclose that the exception has been applied and provide the basis for its assessment.
• Treating the safe harbour as automatic without testing whether the CbCR qualifies. The AFM’s 2024 thematic review of tax provisions at Dutch-listed entities flagged instances where groups applied the safe harbour using CbCR data that was not prepared on a consistent basis with the financial statements, rendering the safe harbour inapplicable.

Related content

Frequently asked questions

Further reading and source references

• OECD GloBE Model Rules (December 2021): the global minimum tax framework, Articles 3.2.1–3.2.13 (GloBE income adjustments) and Articles 4.1–4.4 (covered taxes).
• OECD Administrative Guidance (February 2023, July 2023, December 2023): transitional safe harbours and CbCR qualification criteria.
• IAS 12 Amendments (May 2023), International Tax Reform: Pillar Two Model Rules: paragraphs 4A, 88A, and 88B on the deferred tax exception and disclosure requirements.
• EU Minimum Tax Directive (Council Directive 2022/2523): the EU transposition framework for the Income Inclusion Rule and Undertaxed Profits Rule.
• ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures: the framework for testing the top-up tax as an accounting estimate.
• ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements: paragraph 14 on compliance with Pillar Two implementing legislation.