Pillar Two Global Minimum Tax: What Auditors Must Know

Q: How does the IAS 12.4A deferred tax exception work for Pillar Two?

IAS 12.4A introduces a mandatory temporary exception: entities must not recognise or disclose deferred tax assets and liabilities related to Pillar Two income taxes. The deferred tax calculation proceeds as if the Pillar Two legislation did not exist. This exception has no end date. Current tax from Pillar Two top-up charges is still recognised normally.

Q: What disclosures does IAS 12.88A-88C require for Pillar Two?

IAS 12.88A requires disclosure that the entity applied the deferred tax exception. IAS 12.88B requires disclosure of known or reasonably estimable exposure information for periods where legislation is enacted but not yet in effect, including jurisdictions with ETRs below 15% and expected top-up tax amounts. IAS 12.88C requires separate disclosure of current tax expense related to Pillar Two top-up taxes for periods where legislation is already in effect.

About 140 jurisdictions signed onto the OECD’s Pillar Two framework. Fifty-five had implementing legislation in force at the start of the 2024 fiscal year, and the EU Minimum Tax Directive (2022/2523) required every member state to enact domestic rules for the Income Inclusion Rule (IIR) by 31 December 2023. The paragraph reference your tax note now hangs on ( IAS 12 .4A) did not exist two years ago, and the 47-page memo the group controller forwarded from the parent’s tax adviser is the first time most audit teams will have seen a GloBE ETR calculation.

We were told the rules would be stable. They were not. The February 2026 side-by-side arrangement with the US federal income tax system landed three weeks before Dutch year-end close, and the tax advisers had to redo their memos.

The OECD Pillar Two rules impose a 15% minimum effective tax rate on multinational groups with consolidated revenue above €750 million, affecting the audit of current tax and deferred tax under IAS 12 as amended in May 2023.

Key Takeaways

How to apply the IAS 12 .4A temporary exception to deferred tax arising from Pillar Two legislation
What specific disclosures IAS 12 .88A–88C require and how to test them
How to identify whether your client falls within scope (the €750 million consolidated revenue threshold under OECD GloBE Article 1.1)
When top-up tax becomes a current tax liability on your client’s balance sheet

Why Pillar Two appears on your audit

The OECD published the GloBE (Global Anti-Base Erosion) model rules in December 2021. Over 140 jurisdictions have since committed to implementing them. The EU Minimum Tax Directive required all member states to enact domestic legislation for the IIR from 1 January 2024 and the Undertaxed Payments Rule (UTPR) from 2025. The Netherlands enacted the Wet minimumbelasting 2024 on 28 December 2023, effective for fiscal years starting on or after 31 December 2023.

For any Dutch-parented group (or Dutch subsidiary of a foreign group) with consolidated revenue above €750 million, Pillar Two is already affecting FS you are signing off on now. Even for groups below that threshold, the disclosures about whether the client assessed its exposure are becoming a standard review point.

The core mechanism is straightforward. If a group’s effective tax rate (ETR) in any jurisdiction falls below 15%, a top-up tax is charged to bring it to 15%. That top-up tax can be collected by the parent jurisdiction (via the IIR), by other jurisdictions (via the UTPR), or by the low-tax jurisdiction itself (via a Qualified Domestic Minimum Top-up Tax, or QDMTT). The auditor’s question is how this top-up tax affects the numbers and disclosures in the FS you are auditing.

What changed: before and after the IAS 12 amendments

In May 2023 the IASB issued narrow-scope amendments to IAS 12 specifically addressing Pillar Two. The amendments did two things.

Before the amendments

There was no guidance on how to account for deferred taxes arising from enacted Pillar Two legislation. Different firms were reaching different conclusions. Some were recognising DTLs on temporary differences that would trigger top-up tax in future periods. Others were not. The IASB received urgent requests from preparers and regulators for clarity because the legislation was already being enacted in multiple jurisdictions with effect from January 2024.

After the amendments ( IAS 12 .4A-4B)

Two rules apply. First, entities must apply a mandatory temporary exception: they do not recognise or disclose DTAs and DTLs related to Pillar Two income taxes. This is not an option. IAS 12 .4A states the exception applies to income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules, including QDMTTs. Second, new disclosure requirements apply under IAS 12 .88A-88C, split into two phases depending on whether the legislation is in effect for the reporting period.

Four audit actions follow on a live engagement.

Confirm the client has identified all jurisdictions where Pillar Two legislation is enacted or substantively enacted. Verify the client has applied the deferred tax exception (not recognised deferred tax on Pillar Two temporary differences) and disclosed that fact per IAS 12 .88A. Test the quantitative and qualitative exposure disclosures required by IAS 12 .88B for periods where legislation is enacted but not yet in effect. For periods where the legislation is already in effect, verify the entity has separately disclosed current tax expense relating to Pillar Two top-up taxes per IAS 12 .88C.

Scope: does your client fall within Pillar Two

The GloBE rules apply to multinational enterprise (MNE) groups with annual consolidated revenue of at least €750 million in at least two of the four fiscal years immediately preceding the tested year. This mirrors the Country-by-Country Reporting (CbCR) threshold under BEPS Action 13.

If your client is a standalone entity or a domestic-only group, Pillar Two does not apply (with one exception: some jurisdictions, including certain EU member states, have extended their domestic legislation to wholly domestic groups). If your client is a subsidiary of a large foreign group, the parent may already be subject to Pillar Two in its home jurisdiction, but the client’s local FS may still need to reflect QDMTT or UTPR charges.

The US dimension

In February 2026, the OECD Inclusive Framework agreed a side-by-side arrangement recognising the US federal income tax system (including GILTI, CAMT, and BEAT) as coexisting with the GloBE rules. For US-parented groups, this reduces GloBE reporting obligations from 2026 onward but does not eliminate them for 2024 and 2025 filings. If your client’s ultimate parent is US-headquartered, you still need to assess whether GloBE charges applied in the current and prior years and whether the side-by-side arrangement changes the go-forward exposure. This is a rapidly evolving area. Confirm the client’s tax advisers have considered the most recent Inclusive Framework guidance before relying on any exemption.

Transitional safe harbours

The OECD introduced transitional safe harbours (available for fiscal years starting on or before 31 December 2026) that allow groups to use CbCR data as a simplified proxy for GloBE calculations. If your client claims a safe harbour, you need the CbCR data for the jurisdiction and evidence that one of the safe harbour tests (simplified ETR, de minimis, or routine profits) is met. The safe harbour does not eliminate the disclosure obligation under IAS 12 .88B.

The scoping exercise on a real audit involves four steps. Confirm group consolidated revenue from the parent’s published FS or CbCR filings. Check whether the €750 million threshold was met in at least two of the four preceding years. Identify all jurisdictions where group entities operate and determine whether Pillar Two legislation has been enacted or substantively enacted in each. Document your conclusion in the tax risk assessment WP.

If the client is below the threshold, document why Pillar Two does not apply. Reviewers (and regulators) want to see that you considered it.

The deferred tax exception in practice

The exception under IAS 12 .4A is mandatory and has no end date. The IASB noted in BC106 of the Basis for Conclusions that it is not yet possible to determine when sufficient information will be available to design an appropriate deferred tax accounting model for Pillar Two. Until then, entities do not recognise deferred taxes on temporary differences to the extent those deferred taxes arise from Pillar Two legislation.

The audit team needs to identify whether any deferred tax balances already on the balance sheet were calculated with reference to enacted Pillar Two rates. If the client’s tax team has included Pillar Two rates in deferred tax computations (for example, adjusting the enacted rate used for deferred tax measurement in a jurisdiction that enacted a QDMTT), those amounts need to be backed out. The exception requires that the deferred tax calculation proceeds as if the Pillar Two legislation did not exist.

Test this by obtaining the client’s deferred tax schedules and confirming the rates used in each jurisdiction. Verify that no jurisdiction-level deferred tax balance includes a Pillar Two top-up component. Where the client operates in jurisdictions with both regular corporate income tax and enacted Pillar Two rules, the deferred tax should reflect only the regular corporate income tax rate.

The exception does not affect current tax. If a top-up tax is payable for the current period under enacted GloBE rules, the entity recognises that as current tax expense. Only the deferred tax recognition and disclosure obligation is carved out. Watch for a PIOOMA estimate in the exposure note: we have seen tax directors quote a top-up figure that turned out to be pulled from a Q2 board paper nobody has refreshed. If the number driving the IAS 12 .88B disclosure has no working underneath it, the disclosure is not supported.

Disclosure requirements your reviewer will check

IAS 12 ’s amendments introduced a phased disclosure regime. Requirements differ depending on timing.

For periods where Pillar Two legislation is enacted or substantively enacted but not yet in effect for the entity, IAS 12 .88B requires disclosure of known or reasonably estimable information about the entity’s exposure to Pillar Two income taxes. The IASB did not prescribe a specific format. The standard accepts several disclosure styles (qualitative descriptions, indicative ranges, or more precise quantitative estimates) depending on what information is available. At minimum, the entity should disclose which jurisdictions have ETRs below 15% on a GloBE basis, the aggregate amount of profit in those jurisdictions, and an indication of the expected top-up tax exposure. If that information is not reasonably estimable, the entity must say so explicitly ( IAS 12 .88B(b)).

For periods where Pillar Two legislation is already in effect, IAS 12 .88C requires the entity to separately disclose current tax expense (or income) related to Pillar Two top-up taxes. This is a line-item disclosure. The reader should be able to identify the Pillar Two current tax charge without aggregating it into the general current tax line.

Your audit procedures should cover both. Obtain the client’s Pillar Two jurisdiction-by-jurisdiction ETR analysis. Test the accuracy of the GloBE ETR calculations against the GloBE income and covered taxes definitions (these differ from statutory ETR). Assess whether the disclosures are consistent with the data in that analysis. Verify that the entity has disclosed the application of the IAS 12 .4A exception per IAS 12 .88A.

Internal links: use the ciferi ISA 540 calculator for testing estimates embedded in the Pillar Two ETR analysis, and see the ciferi glossary entry on deferred tax for the underlying IAS 12 mechanics.

Worked example: Van Leeuwen Precision B.V.

Client scenario. Van Leeuwen Precision B.V. is a Dutch manufacturing company with €28 million revenue. It is a wholly-owned subsidiary of Van Leeuwen Group N.V., a publicly listed Dutch holding with consolidated revenue of €1.1 billion. Subsidiaries operate in the Netherlands, Germany, Ireland, and Singapore. Singapore benefits from a concessionary tax rate of 5%. Reporting date: 31 December 2025.

Step 1: Confirm scope

Group consolidated revenue is €1.1 billion, exceeding the €750 million threshold. The threshold was also met in fiscal years 2023 and 2024. Pillar Two applies to the group.

Documentation note: Record the group revenue for the four preceding fiscal years in the tax risk assessment WP. Source: Van Leeuwen Group N.V. published consolidated FS, page 84.

Step 2: Identify jurisdiction-level ETRs

The group tax team provides an ETR schedule showing: Netherlands 25.8%, Germany 29.8%, Ireland 12.5% (standard rate, but effective GloBE ETR is 14.2% after adjusting for substance-based income exclusion), Singapore 5.0%.

Documentation note: Obtain and file the group’s GloBE jurisdiction-level ETR schedule. Reconcile to the statutory FS of each entity. Flag Ireland and Singapore as jurisdictions below 15%.

Step 3: Determine top-up tax exposure

Singapore’s GloBE ETR of 5.0% triggers a top-up tax of 10.0% on Singapore GloBE income. Singapore GloBE income is €4.2 million. Top-up tax: €420,000. Ireland’s GloBE ETR of 14.2% triggers a top-up tax of 0.8%. Ireland GloBE income is €12.8 million. Top-up tax: €102,400. The Netherlands has enacted a QDMTT. Singapore has not. The Singapore top-up tax is collected via the Dutch IIR.

Documentation note: Record the top-up tax calculation per jurisdiction. Identify the collection mechanism (IIR vs QDMTT vs UTPR). File the client’s GloBE income computation for Singapore and Ireland.

Step 4: Test the disclosures

Van Leeuwen Precision B.V.’s own FS need to reflect the QDMTT or IIR charge allocated to it via intercompany tax sharing. Van Leeuwen Group N.V.’s consolidated FS need the IAS 12 .88C separate current tax disclosure for Pillar Two and confirmation that the IAS 12 .4A exception was applied.

Documentation note: Agree the Pillar Two current tax charge to the tax computation. Verify the separate disclosure line in Note 9 (Income Taxes). Confirm the deferred tax schedules exclude Pillar Two rates.

The reviewer sees a file that identifies scope and calculates jurisdiction-level exposure with actual numbers, then traces the disclosure to the FS. That is what passes review.

Practical checklist

Confirm whether the group exceeds the €750 million consolidated revenue threshold in at least two of the four preceding fiscal years, and document the source of the revenue figures used ( ISA 500.6 ).
Obtain the client’s GloBE jurisdiction-level ETR schedule and test the accuracy of the GloBE income and covered taxes calculations against OECD GloBE Article 3.2 definitions (not statutory ETR definitions).
Verify that no deferred tax balances include a Pillar Two top-up component by checking the enacted rates used per jurisdiction against pre-Pillar Two rates ( IAS 12 .4A).
Test the IAS 12 .88B exposure disclosures against the jurisdiction ETR data. Are all sub-15% jurisdictions identified, and is the estimated exposure range consistent with the calculations?
For periods where Pillar Two is in effect, confirm the Pillar Two current tax charge is separately disclosed per IAS 12 .88C and agrees to the tax computation.
Document the IAS 12 .4A exception application in the audit completion memo, including which jurisdictions triggered the analysis.

Common mistakes

Failing to scope Pillar Two at the subsidiary level. The AFM expects auditors of Dutch subsidiaries within large groups to assess whether Pillar Two charges (QDMTT, IIR allocations) affect the subsidiary’s standalone FS, not only the consolidated statements. Several 2024 review files flagged missing documentation at the subsidiary level (AFM, Sector in Beeld 2024, Accountancy en Verslaggeving, 28 November 2024).
Using statutory ETR instead of GloBE ETR for the jurisdiction-level analysis. The GloBE ETR adjusts for items like substance-based income exclusions and covered tax adjustments that do not appear in a statutory tax rate reconciliation. Applying the wrong rate produces incorrect top-up tax estimates and misleading disclosures.
Omitting the IAS 12 .88B disclosure entirely because the client’s tax team said the impact is not material. IAS 12 .88B requires disclosure of exposure information even if the top-up tax amount itself is immaterial. The IASB designed this as a transparency requirement. A missing disclosure is a finding, regardless of the dollar amount.
Accepting a PIOOMA number for the top-up exposure estimate. If the client cannot show you the GloBE ETR calculation underlying the IAS 12 .88B range, the disclosure is unsupported. We have seen this on about half the engagements where Pillar Two came up for the first time.

Deferred tax glossary entry covering how IAS 12 temporary differences work, including the Pillar Two exception.
ISA 540 accounting estimates calculator for testing the reasonableness of the GloBE ETR estimates embedded in the client’s Pillar Two analysis.

Frequently asked questions

What is the Pillar Two global minimum tax?

Pillar Two is the OECD’s Global Anti-Base Erosion (GloBE) framework that imposes a 15% minimum effective tax rate on multinational groups with consolidated revenue above €750 million. If a group’s effective tax rate in any jurisdiction falls below 15%, a top-up tax is charged to bring it to 15%, collected via the Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR), or a Qualified Domestic Minimum Top-up Tax (QDMTT).

How does the IAS 12 .4A deferred tax exception work for Pillar Two?

IAS 12 .4A introduces a mandatory temporary exception: entities must not recognise or disclose deferred tax assets and liabilities related to Pillar Two income taxes. The deferred tax calculation proceeds as if the Pillar Two legislation did not exist. This exception has no end date. Current tax from Pillar Two top-up charges is still recognised normally.

What disclosures does IAS 12 .88A–88C require for Pillar Two?

IAS 12 .88A requires disclosure that the entity applied the deferred tax exception. IAS 12 .88B requires disclosure of known or reasonably estimable exposure information for periods where legislation is enacted but not yet in effect, including jurisdictions with ETRs below 15% and expected top-up tax amounts. IAS 12 .88C requires separate disclosure of current tax expense related to Pillar Two top-up taxes for periods where legislation is already in effect.

Does Pillar Two apply to my audit client?

Pillar Two applies to multinational enterprise groups with annual consolidated revenue of at least €750 million in at least two of the four fiscal years immediately preceding the tested year. Even for groups below the threshold, auditors should document that they considered Pillar Two applicability, as this is becoming a standard review point.

What are the transitional safe harbours for Pillar Two?

The OECD introduced transitional safe harbours available for fiscal years starting on or before 31 December 2026. These allow groups to use Country-by-Country Reporting data as a simplified proxy for GloBE calculations if one of the safe harbour tests (simplified ETR, de minimis, or routine profits) is met. The safe harbour does not eliminate the IAS 12 .88B disclosure obligation.