Key points

  • Greater transparency around tax structures and strategy is needed for investors to identify which companies are most at risk from the so-called ‘top-up tax’.
  • The International Accounting Standards Board (IASB) has recently introduced targeted disclosure requirements by amending International Accounting Standard (IAS) 12 Income Taxes to help investors better understand which companies are potentially most exposed.
  • Further transparency is needed to help investors understand which low tax rates are genuinely sustainable and therefore represent a competitive advantage, and which low tax rates are a risk.

I recall a comment several years ago from a retiring finance director of a large UK-listed company. He told me how proud he was that over his tenure he reduced the group’s tax rate by 1% per annum for a decade. On reflection, I suddenly realised just how much of a driver tax was of historic EPS (earnings per share) growth. It also left me questioning the sustainability of the tax rate.

Fast forward to October 2021, and the global minimum tax for large multinational companies was agreed by the OECD (Organisation for Economic Co-operation and Development). From the beginning of 2024, large multinational companies will need to pay at least 15% of their profits in each country they operate in. How much additional tax will this raise? The OECD estimates that it would increase corporate taxes by 9%, but the IMF (International Monetary Fund) estimates it will increase taxes by less than 6%. Country estimates range from 2% to 12%.1

What counts for the portfolios we manage is the impact on specific stocks, but how can we estimate which companies are most exposed to the top-up tax?

The problem

Tax is one of the biggest expenses for most companies, but it is also one of the most difficult to analyse due to very limited disclosure. This makes it hard for users to gauge the sustainability of tax rates. Greater transparency is needed urgently.

It is critical for investors to be able to identify which companies are most at risk from the top-up tax, but under current disclosure this is almost impossible to do.

We can only screen for companies with an aggregate effective tax rate below 15%, but this will miss a lot of companies exposed to a top-up tax because it does not differentiate between a company paying tax in a single jurisdiction with a 15% tax rate which is not at risk, and a company paying tax in two jurisdictions, one with a 30% tax rate and one with a zero tax rate, which is at risk as the tax rate would increase to 22.5%.

A low tax rate is often considered a ‘low-quality’ component of earnings because of the risk that it is unsustainable. Greater transparency around the tax structures and strategy would help users understand which low tax rates are genuinely sustainable and can indeed be a source of competitive advantage.

There is a strong link to governance: if a management team is aggressive in its tax planning, it may well be aggressive in other areas too.

The solution

The IASB (International Accounting Standards Board) has recently amended IAS (International Accounting Standard) 12 Income Taxes which includes targeted disclosure requirements to help investors better understand a company’s potential exposure to the top-up tax. For accounting periods beginning on or after 1 January 2023, entities need to disclose:

(a) their current tax expense (if any) related to the Pillar Two2 income taxes; and

(b) during the period between the legislation being enacted or substantially enacted and the legislation becoming effective, known information (or a reasonable estimate) that would help users of financial statements to understand an entity’s exposure to Pillar Two income taxes arising from that legislation. If this information is not known or cannot be reasonably estimated, entities are instead required to disclose a statement to that effect and information about their progress in assessing the exposure.

The original proposal included more prescriptive quantitative requirements, that entities disclose the aggregate amount of profit before tax and the aggregate tax expense for countries where the effective tax rate is below 15%. However, companies were reluctant to provide these estimates due to uncertainty both in terms of timing and detail.

When forecasting the future, we also need to consider mitigating actions, by both countries and companies, which means that any estimate of the potential top-up tax is likely to be significantly larger than the estimate of the most likely top-up tax after all mitigating actions are considered.

Other considerations

In my opinion, additional detailed disclosure, in the three areas outlined below, would be helpful when considering future amendments to the accounting standard on IAS 12 Income Taxes.

  1. Analysis of cash taxes paid by country and period. Users need to see where the group pays tax and what period it relates to, subject to the normal materiality test for any disclosure. We note that under the OECD’s BEPS3 Action 13, all large multinational enterprises are required to prepare a country-by-country report. This will help us understand the sustainability of the tax structures in place.
  2. Taxes paid within associates and joint ventures.  This currently falls outside of the scope of IAS 12 but if the top-up tax is material for a material joint venture, this should be disclosed too, as per IAS 1, if it is material to the overall investment decision.
  3. Impact on minority interest. Equity investors want to model the potential impact on EPS. If the top-up tax relates to a 100% owned subsidiary, the impact is greater than if the top-up tax relates to an 80% owned subsidiary.

Closing thought

The forthcoming top-up tax is a real-life test of which companies have sustainable tax structures, and which don’t. The new targeted disclosure requirements will help investors anticipate exposure, and move closer to the best available version of the truth, but the ultimate answer will only become apparent over the next few years when we will see which companies are paying more tax.


  1. Tax Foundation. Select Country-Level Revenue Estimates for Pillar Two, 4 April 2023

2. PWC. Global implementation of Pillar Two: narrow-scope amendments to IAS 12 24 May 2023

3. OECD. BEPS – Inclusive framework on base erosion and profit shifting


Jeremy Stuber

Jeremy Stuber

Global research analyst, specialist research team


Your email address will not be published.

Newton does not capture and store any personal information about an individual who accesses this blog, except where he or she volunteers such information, whether via email, an electronic form or other means. Where personal information is supplied, it will be used only in relation to this blog, and will not be collected or stored for any other purpose. Comments submitted via the blog are moderated, and, as a result, there may be a delay before they are posted.

This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice.

Important information

This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.

Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.

Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.

Explore topics