Key Points
- Pillar Two applies to groups with EUR 750 million or more in consolidated revenue.
- A GloBE effective tax rate below 15% in any jurisdiction triggers a top-up tax charge.
- IAS 12 prohibits recognising deferred tax arising from Pillar Two legislation (mandatory exception).
- Missing the required Pillar Two disclosures is the most common compliance gap on affected engagements.
What is Pillar Two (Global Minimum Tax)?
The OECD published the Global Anti-Base Erosion (GloBE) Model Rules in December 2021. Four elements enforce the 15% floor. The Income Inclusion Rule (IIR) requires the parent entity to pay top-up tax on low-taxed income of its subsidiaries. The Undertaxed Profits Rule (UTPR) operates as a backstop when the IIR does not apply. The Qualified Domestic Minimum Top-up Tax (QDMTT) allows a jurisdiction to collect the top-up tax itself before the IIR or UTPR applies. A substance-based income exclusion carves out a return attributable to tangible assets and payroll, so only "excess" profit is subject to top-up tax.
By early 2026, 22 of the 27 EU Member States had implemented both the IIR and a QDMTT. The EU Directive (2022/2523) required transposition by 31 December 2023, with the IIR effective for fiscal years beginning on or after that date and the UTPR effective one year later.
For the auditor, the immediate accounting question is what happens to deferred tax. IAS 12.4A introduces a mandatory temporary exception: entities must not recognise deferred tax assets or liabilities arising from Pillar Two legislation. This is not optional. IAS 12.88A requires disclosure that the exception has been applied. Where legislation is enacted or substantively enacted but not yet in effect, IAS 12.88B–88C require the entity to disclose known or reasonably estimable information about its Pillar Two exposure, including the jurisdictions where the GloBE effective tax rate is below 15%.
Worked example: Groupe Lefèvre S.A.
Client: Belgian holding company, FY2025, revenue EUR 185 million, IFRS reporter. Groupe Lefèvre owns operating subsidiaries in four jurisdictions: Belgium, Ireland, Hungary, and Portugal (the Portuguese subsidiary is immaterial for this example). Belgium's corporate income tax rate is 25%. The Irish subsidiary pays an effective rate of 14.2% (after R&D credits). The Hungarian subsidiary benefits from a development tax incentive that reduces its effective rate to 9.8%. Both the Irish and Hungarian rates fall below the 15% GloBE minimum.
Step 1 — Determine scope
Groupe Lefèvre S.A. is the ultimate parent of a group with consolidated revenue of EUR 1.2 billion (the EUR 185 million figure is the parent's standalone revenue; the threshold applies at consolidated level). Consolidated revenue exceeded EUR 750 million in two of the four preceding fiscal years. Pillar Two applies.
Step 2 — Calculate jurisdictional GloBE effective tax rates
The Irish subsidiary reports GloBE income of EUR 18 million and covered taxes of EUR 2.56 million, producing a GloBE ETR of 14.2%. The Hungarian subsidiary reports GloBE income of EUR 7.4 million and covered taxes of EUR 725,000, producing a GloBE ETR of 9.8%. Belgium's ETR is 24.6%, well above the 15% floor.
Step 3 — Compute top-up tax
For Ireland, the top-up tax percentage is 0.8% (15% minus 14.2%). Applied to excess profit (GloBE income of EUR 18 million less the substance-based income exclusion of EUR 2.1 million for payroll and tangible assets), the top-up tax is approximately EUR 127,000. For Hungary, the top-up tax percentage is 5.2%. Applied to excess profit of EUR 5.9 million (after substance-based exclusion of EUR 1.5 million), the top-up tax is approximately EUR 307,000. Total top-up tax for the group is EUR 434,000.
Step 4 — Apply the IAS 12 temporary exception and prepare disclosures
Under IAS 12.4A, Groupe Lefèvre does not recognise any deferred tax assets or liabilities in relation to the Pillar Two legislation. The top-up tax of EUR 434,000 is recognised as current tax expense when it becomes payable. IAS 12.88B requires disclosure of the jurisdictions where the GloBE ETR falls below 15% (Ireland at 14.2%, Hungary at 9.8%) and the aggregate top-up tax exposure.
Conclusion: the top-up tax of EUR 434,000 is defensible because each jurisdictional ETR is traceable to the GloBE computation, the substance-based exclusions are supported by payroll and asset data, the IAS 12 temporary exception has been correctly applied, and the note disclosures satisfy IAS 12.88A–88D.
Why it matters in practice
Teams apply the IAS 12.4A temporary exception without disclosing it. IAS 12.88A explicitly requires the entity to state that it has applied the exception. When Pillar Two legislation is enacted but not yet in effect for the entity's fiscal year, IAS 12.88B–88C require disclosure of known or reasonably estimable exposure information. Omitting these disclosures while applying the exception is the most common gap on early-adoption engagements.
Auditors on mid-market group engagements sometimes assume Pillar Two does not apply because the parent entity's standalone revenue falls below EUR 750 million. The threshold applies to consolidated revenue of the ultimate parent entity's group. A mid-market subsidiary within a large multinational group is within scope even if the local entity is small.
Pillar Two vs. transfer pricing
| Dimension | Pillar Two (global minimum tax) | Transfer pricing |
|---|---|---|
| Objective | Ensures a minimum 15% effective tax rate per jurisdiction | Ensures intercompany transactions are priced at arm's length |
| Governing framework | OECD GloBE Model Rules, EU Directive 2022/2523, IAS 12.4A–4B | OECD Transfer Pricing Guidelines, local legislation, IAS 12 |
| Scope trigger | Consolidated group revenue of EUR 750 million or more | Any controlled transaction between related parties |
| Audit focus | Jurisdictional ETR computation, top-up tax measurement, IAS 12 disclosure compliance | Arm's length pricing, benchmarking studies, documentation completeness |
| Interaction | A transfer pricing adjustment that reduces a jurisdiction's ETR below 15% can trigger top-up tax | A Pillar Two top-up tax does not change the arm's length price, but it changes the tax cost of the pricing structure |
The two frameworks intersect when a transfer pricing adjustment shifts profit into a low-tax jurisdiction, pushing that jurisdiction's GloBE ETR below 15%. The auditor testing a master file / local file should consider whether the pricing structure creates Pillar Two exposure that management has not quantified.
Related terms
Frequently asked questions
Does Pillar Two apply to domestic groups that operate in only one country?
Yes, if a jurisdiction has enacted a QDMTT. The QDMTT applies the 15% minimum rate domestically, regardless of whether the group has foreign operations. A purely domestic group with consolidated revenue above EUR 750 million and an effective rate below 15% (due to incentives or credits) can owe top-up tax in its own jurisdiction. IAS 12.4A still applies.
How do I audit the GloBE effective tax rate calculation?
Obtain management's jurisdictional GloBE computation, which starts with accounting profit and adjusts for items specified in the Model Rules (such as excluded dividends, stock-based compensation timing differences, asymmetric foreign currency items, and policy elections for prior-period errors). Test the material adjustments to their source data. Verify covered taxes against the current tax provision and any qualifying deferred tax adjustments permitted under the GloBE rules. ISA 540.13(a) applies to the estimates embedded in the computation.
When does top-up tax hit the income statement?
Top-up tax is recognised as current tax expense in the period to which it relates, consistent with IAS 12.4A's prohibition on recognising deferred tax for Pillar Two. If the entity's fiscal year is the calendar year and Pillar Two legislation became effective 1 January 2024, the first top-up tax charge appears in the FY2024 financial statements. The GloBE Information Return filing deadline follows the local implementation rules, with the earliest cross-border exchange of returns expected from December 2026.