Pillar 2: UK FTSE100 accounts disclosures

The IASB issued an update to IAS12 to include a mandatory temporary exception from providing for deferred tax on anticipated top-up taxes as jurisdictions implement the various elements of the OECD’s global minimum tax regime, ‘Pillar 2’.  Alongside the temporary exception to recognition, IAS12 was updated to set out what is, and is not, required with regard to disclosure.

The first UK groups required to reflect the updated IAS12 in their financial statements are those with a calendar year-end, reporting their YE23 results.  For FTSE100 companies, group accounts have now been filed, and we thought it would be interesting to undertake some analysis of how groups have interpreted the disclosure requirements, and what has been disclosed.

This article sets out some of the highlights from our analysis.  As anyone who has been involved with either Pillar 2, or financial reporting for groups as large and complex as those making up the FTSE100 will appreciate, these insights are intended to be illustrative of possible general trends and to draw out discussion, rather than being definitive factual statements.

• Almost half of the groups reviewed¹ that expect to be within Pillar 2 consider it likely they could pay a top-up tax somewhere in the group.
• Of the population expecting to be within Pillar 2:
  • 80% disclosed the most likely territories that could be impacted and may result in top-up tax;
  • 60% disclosed an estimate of the potential quantum of top-up tax that may be due; and
  • 40% disclosed both an estimate of quantum (in aggregate) and location.
• Based on the information disclosed, we estimate the adoption of Pillar 2 could lead to roughly a 1% increase in current year current tax across the FTSE100. The median increase in current year current tax across those groups who quantified a top-up is roughly 2%.
• The jurisdictions disclosed include Bermuda, the UAE and Ireland, jurisdictions who have either introduced Corporate Income Tax (CIT) regimes or stated an intention to effectively increase their tax rate for impacted businesses.
• Many groups made reference to the transitional safe-harbour provisions and analysis in relation to these, in particular when explaining their basis for concluding no material top-ups were expected.
• Interpretation of the level and style of disclosure varied quite widely across the population.

We reviewed the group accounts for those FTSE100 companies that report on a calendar year basis, specifically their group accounts for the period ended 31 December 2023.

We documented key data points for each group, including:

• whether the group was expected to be within Pillar 2;
• whether accounting policy wording had been included, both with regard to the change to IAS12, as well as confirmation that the temporary exception had been applied;
• whether tax disclosure notes referred to a top-up tax either by jurisdiction or quantum and if so the information disclosed;
• current year current tax; and
• Effective Tax Rate (ETR).

This information was analysed and used to estimate the potential aggregated quantitative impact across the population who provided either an absolute or percentage-based indication of quantum of top-up tax that may be incurred.

Unsurprisingly, the majority (90%) of the population reviewed expect to be within Pillar 2.  Of the remainder, these are generally expected to be relying on one of the exemptions, for example that available to investment entities, for either the whole or the majority of the group.

While the level and approach to disclosure varied across the 55 groups who are expecting to be within Pillar 2, all groups included at least some wording in relation to Pillar 2 and the updated IAS12.

Nearly half, 44%, of these 55 groups expect a top-up tax somewhere in their global group.

30 jurisdictions were highlighted in disclosures across 19 groups, as shown below.

Of particular note is Ireland, which is effectively raising its tax rate for impacted businesses to the global minimum rate. Bermuda has introduced (though it is not yet in effect) a CIT regime in response to Pillar 2. The UAE was also mentioned, a territory that has introduced a CIT regime albeit at a baseline 9% rate. The impact of these changes will be to increase the overseas current tax charge for UK groups, rather than a top-up under Pillar 2 in the UK (in the case of the UAE, the impact will be split between overseas tax and the top-up). There was some variation in disclosure, in particular in relation to Bermuda, though this may be driven more by materiality than principle.

Of these 30 jurisdictions, 17 have a mainstream CIT rate of 15% or greater.  In general, there was limited reference to why these territories were expected to give rise to a top-up, however some groups did reference agreements with tax authorities or special statutory or incentive regimes that had historically resulted in a lower effective rate of tax than the headline rate.  This included the UK with the Patent Box regime mentioned explicitly (as was a similar regime in Belgium).  Even though the number of territories disclosed with a lower than 15% rate was less than those with higher rates, the number of times those territories with lower tax rates were mentioned was proportionately higher.

15 groups disclosed an estimate of the potential quantum of top-up tax that could be due, based on their analysis of how the rules would apply to their business.  The level of analysis undertaken appears to vary between groups based on the disclosure wording, as did the nature of the quantification, between an absolute figure or a percentage of either ETR or current tax.  A subset of 10 groups disclosed both quantum (in aggregate) and jurisdictional information.  It wasn’t possible to undertake a meaningful analysis of quantum by jurisdiction given this aggregation, as the only groups where the quantification could be matched to a jurisdiction were those with only one territory in which a top-up was disclosed as being expected.

The total current year current tax for those groups who disclosed the potential quantum of a top-up was c£14,200m.  Our inferred estimate of the anticipated top-ups, based on the information disclosed, is c£440m, or roughly a 3% average anticipated increase in CYCT for this limited set.  The median impact for this group is approximately 2%, indicating that for the majority of groups expecting a top-up, the top-up is below the 3% average.  When taking into account the overall population reviewed, this average is expected to drop significantly, to roughly 1%.

In general, most groups without a top-up, or no material top-up, expect this to be the case primarily through operation of the transitional safe-harbours in years they are available, as opposed to requiring a full calculation with no ensuing top-up.

On the face of it, our estimate of the potential top-up tax across this population may seem like a large number, at approximately £440m across a sub-set of the groups expecting to incur some form of top-up, who are themselves a small proportion of the UK headquartered groups within the Pillar 2 rules. But this number does not tell the full story.

Firstly, many of the territories for which a top-up is expected have introduced, or are expected to introduce, a Qualifying Domestic Minimum Top-up Tax (QDMTT).  Where a QDMTT is introduced, any ‘top-up’ arising as a result of Pillar 2 will be taxed locally, and not in the UK (in the case of a UK headquartered group).  Based on our qualitative analysis we anticipate that very little of the top-up tax disclosed by the FTSE100 groups will result in increased tax revenues for HMRC. Anecdotally, from our work and discussions with clients, we expect this may be true more generally across UK headquartered groups.  The question is then, where is the £2.3bn annual increase in UK tax revenues noted in the 2022 Autumn Statement² expected to come from?

Secondly, as we noted above, where a jurisdiction aligns their local tax regime and rate to the global minimum, this will result in increased tax payable by the group locally, and not as a top-up tax. The difference is mostly academic to the taxpayer and their investors as the amount of tax payable by the group is likely broadly the same either way, but again in these cases the UK will probably not see any increase in tax revenue.

At the same time, a UK headquartered group is likely to incur a significant proportion of the overall costs of preparing for, and executing, compliance with the reporting requirements of Pillar 2.  While in some cases this may be allocated around the group through intragroup recharging arrangements, we expect the cost of compliance may not consistently correlate between the jurisdiction where the costs of compliance are borne in the first instance and the jurisdictions in which a top-up is due. Add to this the fact that, based on this limited set, the cost of compliance is likely to be comparatively high per unit of tax revenue generated or redistributed, once the dust of implementation settles we anticipate the discussion may turn towards streamlining the regime, be that through permanent safe-harbours or some other mechanism.

How likely a material streamlining of the regime is, and how this could be achieved while maintaining the core objectives of the regime, remains to be seen. In our view, the discussion for the next few years will remain on implementation and first reporting periods. Tax authorities, including HMRC, will look carefully at the first few years of tax revenues and their own costs of monitoring and enforcing compliance.

Pillar 2 is, in concept, more focused on creating a more equitable distribution of tax revenues, more closely aligned to perceived economic reality, than increasing the absolute amount of tax revenues incurred by global businesses.  Albeit the latter is expected to be an inevitable side effect of the regime.

How effective Pillar 2 is at achieving this ambition can’t be reliably predicted at the moment, though it has already had some impact, for example through influencing tax policy in a number of jurisdictions.

What our analysis does imply, from its admittedly limited cross-section of the UK, let alone global, population of businesses subject to Pillar 2, is that for most groups Pillar 2 looks like a regime that is complex to implement and manage but which has a fairly limited impact on the tax profile of the group.  It appears, at least for UK headquartered groups, that the majority of the impact will be felt by the minority of taxpayers.

Pillar 2 represents a significant milestone in global tax reform efforts, signalling a shift towards a more coordinated and harmonised approach to corporate taxation. It disincentivises multinational corporations to move to low tax jurisdictions and should help to level the playing field. The wide adoption reflects the growing consensus among countries to address tax avoidance and ensure that multinational corporations contribute to the societies where they operate. This has been reflected in several jurisdictions, such as Bermuda, which is implementing a corporate income tax for the first time.

[1] FTSE100 calendar year-end reporters

[2] This estimate became £2.2bn in the Spring Budget 2023.

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