On 23 December 2022, the Korean National Assembly officially passed the 2022 Tax Revision Bill originally announced by the Ministry of Economy and Finance back in July 2022.
This is a pivotal moment in the advancement of the global minimum tax “Pillar Two” as South Korea is the first country to codify the GloBE Rules into domestic legislation. The newly passed law provides that a global minimum tax will be introduced from fiscal years beginning on or after 1 January 2024.
South Korea has passed tax law changes including the introduction of a global minimum tax that will apply to MNE groups with consolidated revenue of at least EUR 750 million during two of the previous four business years.
The new law provides that, if the effective tax rate is less than 15% in the jurisdiction of each constituent entity, a top-up tax will have to be paid with regard to the jurisdiction. Applicable companies will have to submit a “GloBE Information Return” within 15 months (or 18 months for the first year of application) from the end of the business year and face a penalty of up to KRW 100 million (approx. CHF 75’000) if they fail to comply with this reporting obligation.
The South Korean “Pillar Two” will apply from fiscal years beginning on or after 1 January 2024. In the case of entities with a December year-end, the deadline to report and pay the tax for the first time will be 30 June 2026. The legislation also includes provisions for an undertaxed profits rule (“UTPR”) similar to the OECD proposal. Important to note is that the final enforcement decree is pending to incorporate further developments at the OECD level (likely GloBE Implementation Framework). The Korean law currently foresees an application of the UTPR as of 1 January 2024 already and not as of 1 January 2025 as prescribed in the OECD guidelines.
Tax accounting update...
The accounting for Pillar Two remains uncertain. On 9 January 2023, the IASB published an exposure draft in response to the GloBE Rules. The proposed amendments to IAS 12 Income Taxes, includes a temporary exception from accounting for deferred taxes arising from the implementation of the GloBE Rules.
The FASB has not issued any update on their response to Pillar Two.
It should, however, be noted that IAS 10 - Events after the Reporting Period gives as an example of non-adjusting events that generally require disclosure “changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities.” Accordingly, entities should assess whether the OECD technical guidance together with the level of commitment of the applicable governments to its implementation constitute the announcement of a change in tax laws in the jurisdictions in which they operate. If this is the case and if the entity concludes that the rules may have a significant effect on its operations, it should disclose that fact in its 2022 financial statements along with an estimate of the impact or a statement that such an estimate cannot be made.
In addition, IAS 1:17(c) requires MNE Groups to provide for ‘…additional disclosures when compliance with the specific required in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.’ Accordingly, MNE Groups in scope, who are expecting to incur top-up taxes in the future should consider whether disclosure under these rules is required in their 2022 annual report.
… and audit of tax impact
It is expected, that MNE Groups will be required to disclose an impact on ETR, where it is expected to be material at the very latest with the annual reports 2023. Hence, MNE Groups in scope of the global minimum tax should start to consider evidence to either support the disclosure they will be making under those circumstances or evidence to support an assumption that the impact would not be material enough and no such disclosure is required just yet.
Implementation is happening
The GloBE Rules will be effective from 1 January 2024. It is important for organizations with a presence in South Korea to develop and execute a plan to determine the potential impact of Pillar Two on their organization.
As the first country has passed domestic legislation with regard to the Global Minimum Tax, we have to anticipate more countries will be issuing draft legislation as well as laws with effective dates starting 1 January 2024.
What can you do now to prepare?
In less than a year, the GloBE Rules will already be in effect. What steps has your organization taken to adopt your operations to manage the imminent compliance and potential additional tax risks brought on by Pillar Two?
If you would like to discuss more on this topic, please do reach out to our key contacts below.
Key contacts
Daniel Stutzmann
Partner, Global Minimum Tax
Manuel Angehrn
Gautam Agarwal
Senior Manager, Accounting Advisory Services
Ryan Peluso
Assistant Manager, Global Minimum Tax
