To: International Accounting Standards Board (IASB)

We appreciate the opportunity to submit public comments on International Tax Reform—Pillar Two Model Rules (hereinafter, the "Exposure Draft"). Our comments are as follows:

General Remarks

• We understand that the proposals in the Exposure Draft are broadly classified into two: the temporary exception rule referred to in Questions 1 and 3(a); and the additional disclosure requirements mentioned in Questions 2 and 3(b). Of these, the temporary exception rule needs to be finalized by March 31, 2023. To achieve that, the IASB should divide the Exposure Draft into the temporary exception rule and the additional disclosure requirements when finalizing the proposed amendments.

  • The finalization of the temporary exception rule is needed extremely urgently (see the Specific Remarks section below for the details). We understand that there are no strong objections to the proposed temporary exception rule, with which we also agree.
  • On the other hand, we have concerns about the proposed additional disclosure requirements (see the Specific Remarks section below for the details). These will require further careful discussions among the concerned parties, which will inevitably take a certain amount of time. Also, as paragraph 98M(b) proposes that entities apply the additional disclosure requirements for annual reporting periods beginning on or after January 1, 2023, the application is still far off. This means that the finalization of these requirements is much less urgently needed than that of the temporary exception rule.

• The temporary exception rule and the additional disclosure requirements greatly differ both in urgency and in the severity of concerns raised. Thus, they should not be examined as a single package. We urge the IASB to first finalize the temporary exception rule as quickly as possible, and then to examine the additional disclosure requirements through careful discussions. In the event that the temporary exception rule is not finalized by March 31, 2023, the IASB should conclude deliberations at the April 11 Board meeting, at the latest, and communicate the conclusion.

Specific Remarks

Temporary exception rule (Questions 1 and 3(a))

• We agree with the proposal. For the reasons listed below, we strongly urge the IASB to finalize the temporary exception rule as quickly as possible.

  • In Japan, many entities' annual reporting period ends on March 31. Then, entities normally prepare financial statements by early May in accordance with the Companies Act. To do so, they usually finalize the financial statements' figures by mid-April.
  • In the event that the temporary exception rule is not finalized in time for the preparation of the financial statements for the annual reporting period ending March 31, 2023, the current IAS 12 would apply as it is; and, in that event, if tax law to implement the Pillar Two mode rules is deemed to have been enacted or substantively enacted,^#1 entities whose annual reporting period ends on March 31 would have to measure deferred taxes as of March 31, 2023, in accordance with the current IAS 12.
  • The problem is that it would be impracticable to measure deferred taxes related to Pillar Two legislation for the annual reporting period ending March 31, 2023, in accordance with the current IAS 12. First of all, the preparatory period for entities would be overwhelmingly insufficient. Also, how to account for such deferred taxes is not yet determined as of now, which means that the factors to be considered in calculating estimates would include an extremely large number of uncertainties. Under such circumstances, no matter how much resources entities allocate, it would be highly difficult to calculate estimates with a certain level of accuracy. This would raise concerns from the perspective of information usefulness as well.
  • We understand that the temporary exemption rule has two objectives: to secure a grace period until the IASB sets appropriate and consistent accounting methods after Pillar Two legislation is enacted or substantively enacted; and to avert initial confusion on accounting practice from Pillar Two legislation. If the temporary exception rule is not finalized in time for the preparation of the financial statements for the annual reporting period ending March 31, 2023, these objectives could not be achieved, causing great confusion to financial reporting practice.
  • The highest priority should be placed on the original purport of the Exposure Draft, which is to give consideration to the practice of entities. Therefore, the temporary exception rule should be separated from the rest of the Exposure Draft and finalized as quickly as possible, even if it means that multiple announcements on Standard amendments will be made in a short period of time and, in consequence, the endorsement, translation, and other Standard-related clerical procedures by national accounting standards-setting bodies worldwide will be duplicated.
  • The above-stated problem might also have an impact on jurisdictions other than Japan in cases where the ultimate parent entity resides outside Japan but the intermediate parent entity resides in Japan.

• We generally agree with matters proposed concerning the temporary exception rule (paragraphs 4A and 88A) and with the effective date and transition measure (paragraph 98M(a)).

  • However, the disclosure proposed in paragraph 88A does not seem necessary because the Exposure Draft stipulates that the application of the temporary exception be mandatory to all entities.

Additional disclosure requirements (Questions 1 and 3(b))

• We do not support the proposed additional disclosure requirements because we have concerns about both periods in which Pillar Two legislation is enacted or substantively enacted, but not yet in effect (hereinafter, "Pre-legislation"; paragraph 88C) and periods in which Pillar Two legislation is in effect (hereinafter, "Post-legislation"; paragraph 88B) as stated below.

• We believe the IASB should first focus on finalizing the temporary exception rule that is much more urgently needed and, once it is done, begin working to finalize the additional disclosure requirements. During the latter process, attention should be paid not only to the practical burden of those requirements on entities as information preparers, but also to the high likelihood that information concerning the profit and tax expense of each entity by jurisdiction may include confidential matters. In finalizing the requirements, careful discussions should be made to identify disclosure items that strike a balance between information usefulness and a practical burden on entities.

Pre-legislation (paragraph 88C)

• In periods before Pillar Two legislation comes into effect, entities will presumably review their group structures and make other rational efforts to minimize additional taxation. Also, the legislation in each country is expected to vary in both timing and content. It can thus easily be imagined that disclosures prepared using estimates calculated based on Pre-legislation information may diverge greatly from the actual figures. Hence, we have strong doubts about making such disclosures, from the perspective of information usefulness.

• In addition, to meet the proposed disclosure requirements, entities would have to create new information collection and aggregation processes, leading to a corresponding practical burden. We think that entities' resources should be allocated solely to preparing information that is truly useful to users of financial statements.

• In many jurisdictions, disclosure for periods in which Pillar Two legislation is not yet in effect is likely to be limited to the 2023 reporting period, and the top-up tax amounts in accordance with paragraph 88B are expected to be disclosed for the subsequent annual reporting periods. Thus, we understand paragraph 88C stipulates a onetime disclosure. From a cost-benefit perspective, too, we consider it inadvisable to force an undue practical burden on entities for the onetime disclosure for which there are doubts about information usefulness.

• Disclosure about legislation in jurisdictions in which an entity operates (paragraph 88C(a))

  • Comprehensively grasping and disclosing information about legislation enacted or substantively enacted in jurisdictions in which an entity operates would incur corresponding costs to preparers of financial statements. However as this information is not specific to the entity but is general and public data, it can be obtained from other information sources. As such, it does not have sufficient importance to warrant disclosure in the financial statements of individual entities.
  • Pillar Two legislation is enacted in each jurisdiction, and the Income Inclusion Rule applies to the ultimate parent entity, in principle. Accordingly, we consider that it should suffice to disclose information solely about legislation in the jurisdiction where the ultimate parent entity resides, and that the disclosure of information about legislation in all jurisdictions where an entity operates would be an undue requirement.

• Disclosure related to the average effective tax rate (paragraphs 88C(b) and (c))

  • In cases where an entity prepares consolidated financial statements through sub-consolidation, aggregating financial figures by jurisdiction requires dividing sub-subsidiaries related to sub-consolidated subsidiaries by jurisdiction and making recalculations. As opposed to the current common practice of collecting aggregated financial information on a sub-consolidated subsidiary basis, disclosing the proposed items would require the entity to newly collect information on an individual sub-subsidiary basis and aggregate it, considerably adding a practical burden.
  • Even if calculations are made, it can easily be assumed that the effective tax rate based on Global Anti-Base Erosion (GloBE) calculations may greatly diverge from the weighted average effective tax rate. It is therefore highly likely that not only would the disclosed calculation results have little usefulness as information, but they could even mislead users of financial statements. That would be even more the case if variable factors emerge in periods before Pillar Two legislation comes into effect as mentioned above.
  • In view of the above, concerns remain about the proposed items from a cost-benefit perspective that considers information usefulness and a practical burden on entities.
  • The amounts of top-up taxes can only be calculated by collecting the necessary information from the constituent entities and conducting complex adjustment calculations. For that reason, the OECD dictates that a GloBE Information Return be filed within 15 months (or 18 months for the first return) after the last day of the reporting fiscal year. It is impracticable to note the possibility of top-up tax amounts in line with the timing of financial reporting. Even if these were estimated and disclosed using some method, there is a possibility that the entity might disclose erroneous information and mislead users of financial statements, depending on the accuracy of the estimates.
  • Also, in regard to the disclosure required in paragraph 88C(c), the assessment and analysis methods at the preparatory stage vary from one entity to another. Information disclosed at the stage when the premises have not been unified might have little usefulness for users of financial statements and could hinder comparability.

  Post-legislation (paragraph 88B)

  • It is unclear why the top-up tax amount needs to be disclosed separately as a breakdown item of income taxes. We consider it necessary for the IASB to clarify the reasons why it proposes separate disclosure.