Section 3465, Income Taxes – International Tax Reform – Pillar Two Model Rules

What you need to know (September 2023)

What are the Pillar Two Model Rules?

1.      In December 2021, the Organisation for Economic Co-operation and Development (OECD) issued
         Pillar Two Model Rules that may impact the taxes payable by large multinational organizations.
         The rules generally apply to multinational groups with revenue in their consolidated financial
         statements exceeding €750 million in at least two of the four preceding fiscal years.

         The objective of these rules is for large multinational groups to pay a minimum amount of tax on
         the adjusted net income arising in each jurisdiction in which they operate. This will be achieved by
         applying a system of top-up taxes that result in the total amount of taxes payable on excess profit
         for each jurisdiction representing at least the minimum rate of 15 per cent.

         The Global Anti-Base Erosion rules (GloBE) rules are not applicable until they are enacted into
         domestic tax law in the respective countries. The GloBE rules have not yet been substantivel
         enacted in Canada. However, an entity could be impacted by the GloBE rules if an intermediate
         parent company within the reporting entity is located in a jurisdiction where the GloBE rules have
         been enacted or substantively enacted.

What’s the issue?

2.     The AcSB heard from its Private Enterprise Advisory Committee that certain entities applying Part II
        of the CPA Canada Handbook – Accounting Standards for Private Enterprises may be impacted by
        the GloBE rules released as part of the Pillar Two initiative by the OECD.

How would the GloBE minimum taxes be accounted for in Part II of the Handbook?

3.     The AcSB thinks it could be concluded that the GloBE minimum tax falls under the definition of
        income taxes in Section 3465, Income Taxes. Income Taxes, paragraph 3465.02(a) states that:

“income taxes include:

i. all domestic and foreign taxes that are based on taxable income;
ii. taxes, such as mining taxes, that are based on a measure of revenue less certain specified
expense;
iii. alternative minimum income taxes, including taxes based on measures other than income
and that may be used to reduce income taxes of another period; and
iv. taxes, such as withholding taxes, that are based on amounts paid to the enterprise.”

Considering the above definition, the GloBE minimum tax may be an alternative minimum tax. To account
for the GloBE minimum tax as an alternative minimum tax, under Section 3465, entities would apply
paragraphs 3465.76-.77.

The GloBE minimum tax rules are complex. Entities are encouraged to have discussions with tax
professionals to understand the GloBE minimum tax rules and their own facts and circumstances.

The AcSB will continue to monitor accounting for GloBE minimum taxes under Part II of the Handbook as
the tax laws related to the International Tax Reform are enacted or substantively enacted in Canada.

Extracts from Section 3465, Income Taxes