Fair Value and Pillar 2: Understanding the GLoBE Rules and Their Fiscal Impacts
Introduction
Fair Value (FV) is a fundamental concept in IFRS accounting, used to measure assets and liabilities at their market value.
However, under the OECD’s Pillar 2, its application is restricted to prevent tax manipulation and ensure alignment with fiscal standards.
Why these restrictions? What are the implications for your business?
In this article, we explain:
- The role of Fair Value in IFRS and international taxation
- The limitations imposed by the GLoBE Rules
- The Realisation Method option to avoid taxation on unrealised gains
- Why a strategic approach is essential for maintaining compliance
💡 Understanding these rules can help you avoid costly mistakes and optimise your Pillar 2 tax management.
1. Fair value in IFRS: a key accounting principle
📌 Definition of fair value
According to IFRS 13, Fair Value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
In other words, it reflects the current market value of an asset or liability, as opposed to historical cost-based accounting models.
📌 Application of fair value in IFRS
Fair value is used in several IFRS standards, including:
✔ IFRS 3 – Business Combinations: When a company acquires another, it must revalue the target’s assets and liabilities to their Fair Value.
✔ IAS 16 – Property, Plant and Equipment: There is an option to measure certain tangible assets at Fair Value.
✔ IAS 38 – Intangible Assets: Some intangible assets can be measured at Fair Value.
✔ IFRS 9 – Financial Instruments: Financial assets are frequently measured at Fair Value through Fair Value Accounting.
🚨 Issue: This methodology can create discrepancies between fiscal accounting and IFRS standards, affecting tax calculations. This is where the GLoBE Rules under Pillar 2 come into play.
2. Why do the GLoBE rules limit fair value?
📌 Risk of tax manipulation
GLoBE Rules are based on the consolidated financial statements of a multinational group. However, if assets are revalued at Fair Value, it may:
• Create temporary or permanent differences between fiscal and accounting values.
• Artificially alter the effective tax rate (ETR) and distort the Pillar 2 calculation.
To avoid these distortions, Article 325 of the GLoBE Rules offers an alternative:
✔ Realisation Method Option: this allows for the elimination of unrealised gains, taxing only realised gains.
3. Fair Value vs. realisation method: impact on businesses
📌 Jurisdictional option for the realisation method
Groups can choose to adopt this method, which applies:
✔ To all constituent entities within a given jurisdiction.
✔ To all assets and liabilities, unless the group restricts the option to tangible assets or investment entities.
💡Advantage: this approach prevents the immediate taxation of Fair Value adjustments recognised during business combinations.
📌 Tracking problems and consolidation constraints
- If a group applies Fair Value in its consolidated IFRS accounts but opts for the Realisation Method under Pillar 2, it must maintain two parallel accounting tracks.
- A newly acquired entity will have its assets revalued at Fair Value under IFRS, yet remain at historical cost under Pillar 2.
- This creates added complexity during entity disposals or mergers.
4. Why an optimisation strategy is crucial (example)
➡ A company acquires another entity applying IFRS 3, triggering a revaluation of its assets.
➡ Under Pillar 2, these adjustments are not considered, and the historical cost is retained.
➡ This can alter deferred tax amounts and influence the calculation of the minimum tax.
Poor anticipation of these discrepancies can result in significant additional tax costs.
The key? Accurate simulations to anticipate the impacts of the various options.
5. Automate your calculations and simulations with GMT Insight
Given the complexity of the GLoBE Rules, a solution like GMT Insight is indispensable. With GMT Insight, you can:
Automate the calculations of adjustments related to Fair Value.
✔ Monitor and manage accounting and fiscal discrepancies in real time.
✔ Optimise your decisions based on the available options.
✔ Save time and reduce the risk of errors.
📢 Any questions? Need clarification? Talk to us on LinkedIn, or contact us. We’re here to help!
