Regulatory updates

In December 2021, the Organisation for Economic Co-operation and Development (OECD) published Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS (the Rules). The Rules were introduced with the objective to address the tax challenges arising from the digitisation of economy by ensuring that large multinational groups²⁷The minimum tax rate of 15 per cent would be applicable to multinational groups having consolidated revenues of EUR 750 million or more in at least two of the preceding four years. pay a minimum amount of tax (i.e., 15 per cent) on income arising in each jurisdiction in which they operate.

Over time, various concerns were raised by the stakeholders regarding the potential implications of the Rules. In particular, uncertainty over the accounting for deferred taxes arising from the Rules was identified as a key challenge area. Thus, in order to address these concerns, the International Accounting Standards Board (IASB), on 9 January 2023, issued an Exposure Draft (ED),International Tax Reform – Pillar Two Model Rules (Proposed amendments to IAS 12). The ED proposed certain amendments to the International Accounting Standard (IAS) 12, Income Taxes. These include:

The ED is open for comments up to 10 March 2023.

To access the text of the ED, please click here

Amendments to IFRS 9

• Clarifying the classification of financial assets with Environmental, Social and Governance (ESG)-linked features: : ESG-linked features in loans could affect whether the loans are measured at amortised cost or fair value and determine whether such loans have cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). The proposed amendments clarify how a company would assess SPPI condition for contractual cash flows arising from financial assets with contingent features. The proposals address a specific call for clarification on how to classify financial assets with an ESG-linked feature – for example, a feature that adjusts the interest rate on an asset by a specified number of basis points depending on whether the borrower achieves a pre-determined ESG or sustainability-related target(s). However, the proposals address all contingent features, not just ESG linked features.

• Classifying contractually linked instruments: To address questions on applying the SPPI requirements to contractually linked instruments, the proposals clarify their key characteristics and how they differ from financial assets with non-recourse features. The proposals also provide factors a company could consider when assessing the cash flows underlying a financial asset with non-recourse features (the ‘look through’ test).

• Settlement of liabilities through electronic payment systems: The IASB proposes to:

• Clarify that an entity uses settlement date accounting when recognising or derecognising financial assets and financial liabilities, and
• Develop new requirements to permit an entity to deem a financial liability that is settled using an electronic payment system to be discharged before the settlement date if specified criteria are met.

Amendments to IFRS 7

• Investments in equity instruments designated at fair value through other comprehensive income: For investments in equity instruments for which subsequent changes in fair value are presented in other comprehensive income, the ED has proposed that:

• Disclosure of an aggregate fair value of equity instruments should be provided instead of the fair value of each instrument at the end of the reporting period, and
• An entity should disclose the changes in the fair value presented in other comprehensive income, during the period.

• Contractual terms that could change the timing or amount of contractual cash flows: The ED has proposed amendments to the disclosure requirements for contractual terms that could change the timing or amount of contractual cash flows on the occurrence (or non-occurrence) of a contingent event. These requirements would be applicable to each class of financial asset measured at amortised cost or fair value through other comprehensive income and each class of financial liability measured at amortised cost.

The ED is open for comments up to 19 July 2023.

To access the text of the ED, please click here