2023 Tax Plan and Pillar 2: Tax accounting considerations

21/09/22

On Budget day 2022, the Dutch government announced several tax law changes as part of the Dutch 2023 Tax Plan. In contrast to previous years, the Dutch Tax Plan 2023 contains limited changes in the field of Dutch Corporate Income Tax (CIT).

Yet, the limit and rate changes proposed to the first CIT bracket will likely have tax accounting implications for small and medium sized companies.

In addition, we also provide an update on the 15 percent global minimum tax (Pillar 2) developments in the Netherlands and the tax accounting implications thereof. For the purpose of addressing the tax accounting implications, we take the International Financial Reporting Standards (IFRS) as the main applicable accounting standard.

For a complete overview of the tax proposals as included in the Dutch tax plan 2023, please refer to our 2023 Tax Plan webpage.

Proposed changes to the first CIT bracket limit and rate

As of 1 January 2023, the limit of the first bracket will be reduced from EUR 395,000 (bracket limit as of 2022) to EUR 200,000. As a result, businesses are more likely to pay the high CIT rate of 25.8 per cent. In addition, the step-up rate for the first bracket is going to increase from 15 per cent to 19 per cent.

Tax accounting impact

IFRS prescribes that deferred taxes are measured against the tax rates (and tax laws) that have been (substantively) enacted by the end of the reporting period and expected to apply when the asset or liability is released.

The proposed changes could affect (especially small sized) companies with profits within the first CIT bracket. Due to the proposed decrease of the first income tax bracket to EUR 200,000 and the proposed increase of the first CIT rate to 19 per cent, any existing deferred taxes (currently calculated at 15 per cent) should be re-measured against the new CIT rate (i.e., 19 per cent respectively 25.8 per cent) upon (substantively) enactment of the proposed changes in the Dutch tax legislation.

Update Pillar 2

Pillar 2 establishes a jurisdictional-level minimum tax system with a minimum effective tax rate of 15 per cent as calculated pursuant to Pillar 2 standards. Multinational enterprises and EU-based large-scale purely domestic groups with (global) consolidated turnover above EUR 750 million in at least two out of the last four years will be within the scope of Pillar 2.

On Budget Day 2022, the Dutch government has not referred to Pillar 2, nor it has published any draft legislation as part of the Dutch Tax Plan 2023.

However, on 9 September 2022, the Dutch government published a joint statement (together with France, Germany, Spain and Italy) to articulate their full commitment to swiftly implement Pillar 2 in 2023 by any possible legal means if no agreement is reached at EU level. Although the joint statement reaffirmed the commitment of the respective countries to implement Pillar 2, it does not clearly mention the effective date. We assume that this is still 31 December 2023 as per the draft Pillar 2 EU Directive.

Tax accounting impact

From the published joint statement dated 9 September 2022, it is clear that the Dutch government also fully supports the implementation of Pillar 2 in the next year. Despite the absence of any concrete draft Pillar 2 Dutch legislation at this moment, we recommend to start evaluating the potential tax impact of Pillar 2 and the tax accounting implications thereof.

Given the current stage of Pillar 2, the tax accounting impact is typically a disclosure issue. The requirement to provide disclosure depends on whether local Pillar 2 legislation has been announced or (substantively) enacted before the financial statements are issued. If local legislation is announced or enacted before the financial statements are issued after the balance sheet date, companies will be required to disclose the significant effect of Pillar 2 in the financial statements pursuant to IAS 10 paragraph 22(h) in conjunction with IAS 12 paragraph 88. The required disclosure should then contain both qualitative and quantitative information.

At this moment, it is clear that Pillar 2 cannot be considered as (substantively) enacted yet in the Netherlands. The question whether the joint statement dated 9 September 2022 can be considered as an announcement under IAS 12 is a matter up for discussion, as no definition of the term “announced” is provided for within IAS 12/IFRS.

However, regardless of whether the joint statement dated 9 September 2022 can be considered as an announcement or not, companies should still consider disclosing the expected impact of Pillar 2 in their financial statements. In fact, IAS 1 paragraph 17 prescribes that a reporting entity should provide additional disclosures when compliance with the specific requirements in IFRS 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.

Therefore, companies for which Pillar 2 will likely have a significant impact should consider preparing Pillar 2 disclosures in the 2022 financial statements. These disclosures are typically qualitative in nature and could entail a non numerical description of the impact of Pillar 2.