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 FS, 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 (SBIE) for payroll and tangible assets). The calculation is performed jurisdiction by jurisdiction, not entity by entity.

The income base for the GloBE ETR uses the financial accounting income from the consolidated FS, with specific adjustments (stock-based compensation, policy elections for fair value gains, intercompany transactions, and asymmetric foreign currency items). This is not the taxable income from the local tax return. The tax base also differs: it includes “covered taxes,” the taxes recorded in the FS 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. Several jurisdictions also adopted a Qualified Domestic Minimum Top-up Tax (QDMTT), which lets the source country collect the top-up tax before the IIR applies. The Netherlands transposed on time (Wet minimumbelasting 2024). Germany and France also transposed by the deadline, along with most other major EU economies. 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. IAS 12 .88B also 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), the current tax expense attributable to Pillar Two, 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 and the covered taxes calculation. The SBIE adds a further layer of judgment. Nobody on the team enjoys this. Pillar Two adds a second, parallel tax computation on top of the local one, with its own income definition and its own tax base. Getting comfortable with the deferred tax interaction alone (what falls under the exception and how covered taxes pick up deferred tax adjustments) can take a senior associate an entire day per jurisdiction the first time through.

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 FS 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 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 FS and the consolidated reporting package.

ISA 540.18 applies: test management’s process, evaluate key assumptions, check the data inputs against source records, 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 if it passes any one of the prescribed tests. The de minimis test applies where the jurisdiction has total revenue below €10M and profit before tax below €1M (based on qualified CbCR data). The simplified ETR test applies where 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). The routine profits test applies where profit before tax is equal to or less than the SBIE amount for that jurisdiction. If none of these tests is met, the full GloBE calculation is required.

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 FS (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 FS, 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 FS. 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 and 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 and 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). You should also confirm 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 FS. The omitted top-up tax is a potential misstatement. The unfiled return may create a penalty exposure that requires disclosure or provisioning. The temptation for groups with stable structures is to “just roll it forward” from the prior year’s Pillar Two analysis, but legislative timelines differ by jurisdiction and new enactments can change the compliance picture between reporting periods.

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.

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 SBIE 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 FS 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

• Taking a SALY approach (same as last year) to Pillar Two scoping, assuming last year’s conclusion still holds without rerunning the GloBE ETR. Legislative enactments and rate changes between periods can flip a jurisdiction into scope.
• 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 FS, rendering the safe harbour inapplicable.
• Ignoring QDMTT legislation in source jurisdictions. Where a subsidiary’s jurisdiction has enacted a QDMTT, the top-up tax is collected locally rather than through the parent’s IIR. Missing this changes which entity books the liability and which set of local filing rules apply.

Related content

• Deferred tax glossary entry covers the IAS 12 framework for temporary differences that forms the baseline understanding for the Pillar Two exception
• Financial ratio calculator can be used to compute effective tax rates by jurisdiction when analysing GloBE ETR trends across reporting periods

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.