Pillar Two: Audit Implications and How to Test the GloBE Calculation

What Pillar Two means for the financial statements you audit

Pillar Two applies to multinational groups with consolidated revenue of at least €750 million in at least two of the four preceding fiscal years. In the Netherlands, the Wet minimumbelasting 2024 took effect on 31 December 2023, implementing both the Qualified Domestic Minimum Top-up Tax (QDMTT) and the Income Inclusion Rule (IIR). The Undertaxed Profits Rule (UTPR) followed for fiscal years starting on or after 31 December 2024.

The GloBE rules require in-scope groups to calculate an effective tax rate (ETR) for each jurisdiction where they operate. If the jurisdictional ETR falls below 15%, a top-up tax is due. This top-up tax is collected through one of the charging mechanisms (QDMTT, IIR, or UTPR), depending on where the low-taxed entity sits in the group structure and which jurisdictions have implemented which rules.

For a Dutch parent auditing under ISA, the Pillar Two tax is a current tax expense in the period it relates to. It is not a deferred tax item. The IASB was explicit about this: the May 2023 amendments to IAS 12 introduced a mandatory temporary exception prohibiting recognition of deferred taxes arising from Pillar Two legislation. This means your audit of the income tax provision has two distinct components for in-scope entities: the standard IAS 12 current and deferred tax calculation (which ignores Pillar Two), and a separate Pillar Two current tax charge based on the GloBE calculation.

The Dutch statutory CIT rate of 25.8% exceeds 15%, so you might assume Dutch entities will never trigger a top-up tax domestically. That assumption is wrong. The GloBE ETR is calculated differently from the statutory ETR. Adjustments to GloBE income include items like stock-based compensation (excluded from GloBE income under certain conditions), revaluations (excluded for fair value accounting), and the Substance-based Income Exclusion (SBIE), which carves out a return on tangible assets and payroll. An entity with significant tax incentives, such as the Dutch innovation box (which taxes qualifying IP income at an effective rate of 9%), could have a GloBE ETR below 15% despite a statutory rate of 25.8%.

The IAS 12 amendments: what changed for auditors

The IASB published International Tax Reform: Pillar Two Model Rules (Amendments to IAS 12) on 23 May 2023. EFRAG endorsed the amendments for EU application shortly after. The amendments do two things that directly affect your audit procedures.

The mandatory temporary exception

Entities must not recognise or disclose deferred tax assets and liabilities related to Pillar Two income taxes. This applies to all taxes arising from enacted or substantively enacted legislation implementing the OECD’s Pillar Two model rules, including QDMTT. The exception is mandatory, not elective. If your client has recognised a deferred tax asset or liability that arises from Pillar Two legislation, it must be derecognised.

In practice, this should be rare (the timing of enactment and the IASB’s speed in issuing the amendments prevented most entities from ever recognising Pillar Two deferred taxes), but verify it during your review of the deferred tax roll-forward.

The disclosure requirements

When Pillar Two legislation is enacted or substantively enacted but not yet in effect, the entity must disclose known or reasonably estimable information about its exposure, including qualitative information about which jurisdictions are affected and where top-up tax may arise.

When Pillar Two legislation is in effect (which it now is, for fiscal years starting on or after 31 December 2023 in the Netherlands and most EU member states), the entity must separately disclose its current tax expense related to Pillar Two income taxes.

For your audit, this means you test two things in the tax note that you didn’t test before Pillar Two existed: the completeness and accuracy of the separate Pillar Two current tax disclosure, and the adequacy of the qualitative and quantitative exposure information. If the entity is relying on safe harbours to treat the top-up tax as zero, you still need to test whether the safe harbour conditions are actually met.

Safe harbours and the CbCR data quality problem

The OECD introduced transitional safe harbour rules in December 2022 to reduce compliance costs during the initial years. The transitional CbCR safe harbour allows a group to treat the top-up tax as deemed zero for a jurisdiction if one of the following conditions is met based on qualifying CbCR data:

• De minimis test: the jurisdiction’s total revenue is below €10 million and profit before tax is below €1 million
• Simplified ETR test: the jurisdiction’s simplified ETR meets or exceeds a transition rate (15% for 2024, 16% for 2025, 17% for 2026)
• Routine profits test: the jurisdiction has no excess profits after the substance-based income exclusion

For your audit, this means you need to perform procedures on the CbCR data when the client relies on the transitional safe harbour. At minimum, reconcile the CbCR revenue and profit before tax figures for the Dutch jurisdiction to the audited financial statements. If you’re the group auditor, request the same reconciliation from component auditors for material foreign jurisdictions. Discrepancies between the CbCR and the financial statements are a red flag that the safe harbour analysis may be based on unreliable data.

The transitional CbCR safe harbour applies for fiscal years starting on or before 31 December 2026 and ending before 1 July 2028. After that, groups must perform full GloBE calculations unless a permanent safe harbour (the simplified ETR safe harbour or the recently announced side-by-side safe harbour) applies. The OECD published the side-by-side package in January 2025, introducing a new framework effective for fiscal years starting on or after 1 January 2026.

Worked example: auditing Pillar Two at Van der Berg Holding N.V.

Client scenario: Van der Berg Holding N.V. is the Dutch ultimate parent of a group with consolidated revenue of €1.1 billion. The group operates in six jurisdictions: Netherlands, Germany, Belgium, Poland, the United Kingdom, and Singapore. The group reports under IFRS. Fiscal year end: 31 December 2025. The Singapore subsidiary benefits from a tax incentive that reduces its effective statutory rate to 8% on qualifying income. The group’s tax advisor has applied the transitional CbCR safe harbour for all jurisdictions except Singapore, where a full GloBE calculation was performed.

Step 1: Identify which entities and jurisdictions are in scope

The group exceeds the €750 million revenue threshold. All six jurisdictions are in scope. The Wet minimumbelasting 2024 applies to the Dutch parent. Germany, Belgium, Poland, and the UK have each implemented domestic Pillar Two legislation effective from 2024 (IIR and QDMTT in all four, with UTPR from 2025).

Step 2: Test the safe harbour application

The tax advisor applied the simplified ETR test from the transitional CbCR safe harbour. For fiscal year 2025, the transition rate is 16%. You need to verify that the simplified ETR for each jurisdiction equals or exceeds 16%.

Step 3: Evaluate the full GloBE calculation for Singapore

The Singapore subsidiary earned €18 million of GloBE income and paid €1.4 million of covered taxes. The GloBE ETR before the SBIE is 7.8%. After applying the substance-based income exclusion (5% of eligible payroll costs of €6 million plus 5% of eligible tangible assets of €12 million = €0.3 million + €0.6 million = €0.9 million), the excess profit is €18 million minus €0.9 million = €17.1 million. The top-up tax percentage is 15% minus 7.8% = 7.2%. The jurisdictional top-up tax is 7.2% multiplied by €17.1 million = €1.23 million.

Under the IIR, this top-up tax is charged to Van der Berg Holding N.V. in the Netherlands. The €1.23 million should appear as a current tax expense in the consolidated income tax note, disclosed separately as Pillar Two income tax per the IAS 12 amendments.

Step 4: Assess the disclosure

The IAS 12 amendments require Van der Berg to disclose the current tax expense related to Pillar Two separately. The note should show the €1.23 million Singapore top-up tax as a distinct line item or a clearly identified component within the income tax reconciliation. It should also disclose qualitative information about the jurisdictions where Pillar Two exposure exists (Singapore, and potentially Poland if the GloBE calculation produces a top-up tax there).

The entity should also disclose the proportion of profits subject to Pillar Two and the average ETR applicable to those profits. For Singapore, 100% of profits are subject, and the ETR is 7.8%. If Poland also triggers a top-up tax, include that jurisdiction as well.

Audit procedures for the GloBE calculation

Auditing the GloBE calculation is new territory for most audit teams. The calculation starts from the group’s consolidated financial statements (or qualifying financial statements in each jurisdiction) and then applies a series of adjustments to arrive at GloBE income and covered taxes per jurisdiction.

Your audit procedures should focus on four areas.

1. Data inputs

GloBE income starts from the consolidated financial statements. Verify that the jurisdictional allocation of income matches the group’s intercompany elimination and consolidation journals. If entities in different jurisdictions use different local accounting standards, the GloBE rules require adjustments to align with the financial accounting standard used in the consolidated financial statements. Test the adjustments.

2. Covered taxes

This is the numerator of the ETR calculation. Agree the current tax expense for each jurisdiction to the respective entity’s financial statements or tax returns. Exclude items that the GloBE rules do not treat as covered taxes. The most common exclusion is the deferred tax expense (the GloBE ETR uses a specific definition of covered taxes that includes some deferred tax adjustments under Article 4.4 but excludes others).

3. Substance-based income exclusion (SBIE)

The SBIE removes a return on tangible assets and payroll from the excess profit calculation. For fiscal year 2025, the SBIE rates are 7.8% of eligible payroll costs and 6.6% of eligible tangible asset carrying values (these rates decrease annually during a ten-year transition period, reaching 5% for both by 2033). Verify the payroll data against payroll records and the tangible asset values against the fixed asset register or financial statements.

4. Top-up tax allocation

The IIR charges the top-up tax to the parent entity. For the UTPR, the tax is allocated to entities in UTPR-implementing jurisdictions based on a formula. A QDMTT keeps the top-up tax in the low-taxed jurisdiction itself. Verify which mechanism applies for each low-taxed jurisdiction and confirm the allocation is consistent with the enacted legislation.

Practical checklist for your current engagement

1. Determine whether Pillar Two applies. Check the group’s consolidated revenue against the €750 million threshold for the preceding four fiscal years. If the group exceeds the threshold in at least two of the four years, Pillar Two is in scope (GloBE Model Rules, Article 1.1).
2. Confirm the mandatory IAS 12 temporary exception. No deferred tax assets or liabilities should exist that relate to Pillar Two legislation. Review the deferred tax roll-forward for any Pillar Two-related items.
3. Test safe harbour conditions. If the entity relies on a safe harbour, reconcile the CbCR data to audited financial statements for each material jurisdiction. Verify that the simplified ETR meets or exceeds the transition rate for the relevant year (15% for 2024, 16% for 2025, 17% for 2026).
4. Review full GloBE calculations. For jurisdictions where a full GloBE calculation was performed, review the calculation for GloBE income, covered taxes, SBIE, and the resulting top-up tax. Agree inputs to underlying financial data.
5. Assess the income tax disclosure. Review the income tax note for separate Pillar Two current tax disclosure and the required qualitative and quantitative information about jurisdictional exposure per the IAS 12 amendments.
6. Evaluate specialist requirements. Assess whether a Pillar Two specialist is required under ISA 620. If you engaged one, evaluate their competence and objectivity per ISA 620.12 and document how you used their work.

Common mistakes

• Assuming a statutory CIT rate above 15% means no Pillar Two exposure. The GloBE ETR is calculated on a different base from the statutory rate. Tax incentives (the Dutch innovation box, Belgian patent income deduction, Singapore pioneer status) can reduce the GloBE ETR below 15% even when the headline rate is far higher.
• Relying on the transitional CbCR safe harbour without verifying data. The CbCR was not designed as a tax liability calculation tool. Data quality issues that were tolerable when the CbCR was a risk assessment filing become material when the safe harbour ties CbCR figures to the top-up tax calculation.
• Omitting separate Pillar Two disclosure. The IAS 12 amendments require the Pillar Two tax expense to be disclosed separately from the standard income tax expense. Burying it in a single-line “income tax expense” figure does not comply with the amendment.

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Frequently asked questions

Further reading and source references

• IAS 12, Income Taxes (as amended May 2023): the source standard governing the mandatory temporary exception and Pillar Two disclosure requirements.
• OECD GloBE Model Rules (December 2021, updated 2023–2025): the international framework defining top-up tax calculations, safe harbours, and the SBIE.
• Wet minimumbelasting 2024: the Dutch implementation of Pillar Two, covering QDMTT, IIR, and UTPR.
• ISA 620, Using the Work of an Auditor’s Expert: applicable when GloBE calculation complexity requires specialist involvement.