Key Points
- BEPS strategies cost governments an estimated USD 100–240 billion in lost revenue annually, according to OECD estimates from the original 2015 package.
- The OECD Inclusive Framework now includes over 145 jurisdictions committed to implementing the four BEPS minimum standards.
- Pillar Two applies a 15% global minimum effective tax rate to multinational groups with consolidated revenue of at least EUR 750 million.
- Auditors assess whether BEPS-related tax positions (transfer pricing, hybrid mismatches, CFC inclusions, interest limitation adjustments) are correctly reflected in the current and deferred tax balances.
What is BEPS (Base Erosion and Profit Shifting)?
The OECD published the final BEPS package in October 2015, containing 15 Actions that address profit shifting through transfer pricing manipulation, treaty abuse, hybrid mismatch arrangements, and harmful tax practices. Four of these Actions carry minimum-standard status, meaning all Inclusive Framework members commit to implementing them and undergo peer review: Action 5 (harmful tax practices), Action 6 (treaty abuse prevention), Action 13 (country-by-country reporting), and Action 14 (dispute resolution).
For European auditors, BEPS materialises through domestic legislation. ATAD I (Directive 2016/1164) introduced interest limitation rules, CFC rules, exit taxation, and anti-abuse provisions across EU member states. ATAD II extended the hybrid mismatch provisions. Since 1 January 2024, EU Directive 2022/2523 requires member states to apply the Pillar Two global minimum tax (the GloBE rules) to qualifying groups. IAS 12.46 requires the entity to measure current and deferred tax using rates enacted or substantively enacted at the reporting date, which now includes Pillar Two top-up tax legislation. The IASB's May 2023 amendments to IAS 12 introduced a mandatory temporary exception from recognising deferred tax arising from Pillar Two, along with targeted disclosure requirements (IAS 12.4A–4C). The auditor evaluates whether the entity has correctly applied this exception and whether the Pillar Two disclosures are complete. On engagements with material Pillar Two exposure, the engagement quality review typically covers the top-up tax conclusions.
Worked example
Client: Belgian holding company, FY2025, consolidated revenue EUR 185M, IFRS reporter. Groupe Lefèvre is a sub-group of a French parent with consolidated revenue of EUR 920M. The Irish subsidiary generates EUR 14M in pre-tax profit at the 15% Irish corporation tax rate.
Step 1 — Determine Pillar Two scope
The French parent's consolidated revenue exceeds EUR 750M in at least two of the four preceding fiscal years. Groupe Lefèvre falls within scope as a constituent entity. Belgium has enacted the QDMTT effective 31 December 2023.
Documentation note: record the ultimate parent entity, the consolidated revenue threshold test, constituent entities by jurisdiction, and applicable domestic implementation dates. Cross-reference to the group's Pillar Two information return.
Step 2 — Calculate the GloBE ETR per jurisdiction
The Irish subsidiary reports EUR 14M GloBE income and EUR 2.1M in covered taxes, producing a GloBE ETR of 15.0% (no top-up tax). The Belgian subsidiaries report combined GloBE income of EUR 9.2M and covered taxes of EUR 2.3M (effective rate 25%), well above the floor.
Documentation note: record the jurisdictional GloBE ETR calculations and the adjustments from accounting profit to GloBE income per the GloBE rules. Note whether top-up tax arises.
Step 3 — Apply the IAS 12.4A exception
No deferred tax is recorded for temporary differences attributable solely to the top-up tax mechanism. The entity discloses Pillar Two exposure by jurisdiction and the GloBE ETR per jurisdiction under IAS 12.4C.
Documentation note: confirm IAS 12.4A is applied. Verify that the Irish jurisdiction (ETR at the 15% boundary) is disclosed with sufficient detail about the risk of future top-up tax.
Step 4 — Evaluate BEPS-related uncertain tax positions
Groupe Lefèvre claims a Belgian innovation income deduction on EUR 3.8M of qualifying IP income, reducing the effective rate on that portion to 3.75%. The BEPS Action 5 peer review found Belgium's regime compliant. The entity concludes under IFRIC 23 that acceptance is probable because the IP meets the substance requirements.
Documentation note: record the IFRIC 23 probability assessment and the BEPS Action 5 compliance basis. Include the R&D expenditure nexus ratio. Cross-reference to the transfer pricing documentation.
Conclusion: no top-up tax liability arises because both jurisdictions meet the 15% GloBE ETR floor and the IAS 12.4A exception is correctly applied. The innovation deduction passes the IFRIC 23 probability threshold.
Why it matters in practice
Teams apply the IAS 12 Pillar Two deferred tax exception (IAS 12.4A) but fail to provide the disclosures required by IAS 12.4C. The IASB's 2023 amendments require entities within scope to disclose current tax expense related to Pillar Two, the jurisdictional ETRs, the aggregate GloBE income for jurisdictions at or below 15%, and the total top-up tax recognised. Omitting these disclosures while claiming the exception creates an incomplete set of financial statements that reviewers flag during engagement quality reviews.
Practitioners sometimes treat BEPS as a pure tax compliance matter and do not connect CFC inclusions or hybrid mismatch adjustments to the deferred tax balance. When a CFC rule imputes income into the parent's tax return, that income may create a temporary difference between the carrying amount of the investment and its tax base. IAS 12.39 requires recognition of a deferred tax liability for such differences unless the parent controls the reversal timing and it is probable the difference will not reverse in the foreseeable future.
BEPS vs Pillar Two (global minimum tax)
| Dimension | BEPS (Actions 1–15) | Pillar Two (GloBE rules) |
|---|---|---|
| Origin | OECD/G20 package published October 2015 | OECD Inclusive Framework agreement October 2021, EU Directive 2022/2523 |
| Scope | All jurisdictions in the Inclusive Framework; measures apply at varying revenue thresholds depending on the Action | Multinational groups with consolidated revenue of at least EUR 750M |
| Mechanism | 15 Actions targeting specific BEPS channels (transfer pricing, treaty abuse, hybrids, CFC rules) | Single top-up tax ensuring a 15% minimum ETR per jurisdiction |
| EU transposition | ATAD I (2016), ATAD II (2017), CbCR Directive (2016), DAC6 (2018) | Directive 2022/2523, transposed by member states from 31 December 2023 |
| Audit impact | Affects transfer pricing documentation, interest deductibility, CFC inclusions, and uncertain tax positions | Adds a jurisdictional ETR calculation, top-up tax line, IAS 12.4A deferred tax exception, and Pillar Two disclosures |
BEPS created the policy framework. Pillar Two is the enforcement mechanism for the minimum tax floor that BEPS alone could not guarantee. An entity can comply with all 15 BEPS Actions and still face a Pillar Two top-up tax if its jurisdictional ETR falls below 15% due to legitimate incentives (patent boxes, investment credits).
Related terms
Frequently asked questions
Does BEPS apply to mid-market companies below the EUR 750M threshold?
Pillar Two applies only to groups with consolidated revenue of at least EUR 750M. However, many BEPS Actions have been transposed into domestic law without a revenue threshold. Interest limitation rules (ATAD I, transposing BEPS Action 4) and CFC rules apply to entities of all sizes in most EU jurisdictions. The auditor assesses the impact on current tax regardless of group size.
How do I document Pillar Two exposure in the audit file?
Record the scoping analysis (ultimate parent, consolidated revenue test, constituent entities by jurisdiction, and fiscal year alignment), the GloBE ETR per jurisdiction, the application of the IAS 12.4A deferred tax exception, and the completeness of IAS 12.4C disclosures. ISA 540.18 applies to management's estimates of GloBE income and covered taxes.
What is the relationship between BEPS and transfer pricing?
BEPS Actions 8–10 revised the OECD Transfer Pricing Guidelines to align pricing outcomes with value creation, introducing stricter substance requirements for transactions involving intangibles and risk allocation. The auditor evaluates whether the entity's transfer pricing positions reflect these revised guidelines, particularly for intercompany royalties or management fees that shift profit to low-tax jurisdictions.