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WHAT is global minimum tax (GMT) and who will be affected?
GMT is a once-in-a-lifetime global tax reform, meant to end tax competition and profit shifting. It is aimed at ensuring that multinational companies (MNCs) pay the right amount of taxes, that is at 15%, regardless of where they operate.
While a MNC group can operate in low-tax, high-tax, zero-tax country or in a country that offers tax incentives, the universal GMT rules would kick in to ensure 15% tax is paid.
GMT applies to MNCs operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750mil (RM3.5bil) in at least two of the four immediately preceding fiscal years.
Two categories of MNCs need to be fully aware of the impact of GMT – large Malaysian-based MNCs that have foreign operations and foreign-based MNCs that have operations in Malaysia.
While Malaysia is not a member of the Organisation for Economic Co-operation and Development (OECD), it is a member of the OECD’s Inclusive Framework. Hence, there is an expectation that it will support and implement GMT.
There is also no reason for Malaysia to avoid GMT implementation as the taxes that could have been collected here will be ceded to other jurisdictions.
On June 3, 2022, the Finance Ministry (MoF) released a pre-budget statement, which stated that Malaysia is currently reviewing the technical details of GMT.
Malaysia acknowledges the OECD’s original plan of implementing GMT in 2023. The OECD has a very ambitious timeline in GMT implementation.
The Income Inclusion Rule, being the main rule, is to be rolled out in 2023, while the backstop rule, the Undertaxed Payments Rule, is targeted to be implemented the following year.
All rules operate as “top-up” to a minimum tax of 15%. Malaysia will need to amend its domestic tax legislation to implement this. A point to note is that there is a plan for the European Union to defer this by one year. It remains to be seen how this will affect Malaysia’s roadmap on GMT.
Similar to Hong Kong and Singapore, the possibility of Malaysia introducing a qualified domestic minimum top-up tax (QDMTT), being part and parcel of the GMT, was also mentioned.
This is not unexpected as QDMTT serves as a mechanism which would enable Malaysia to absorb the potential top-up taxes payable that may otherwise be ceded to other countries.
In our view, the MoF’s statement is useful and timely as it sheds light on Malaysia’s direction on GMT.
This provides some level of certainty for the large Malaysian-based MNCs and foreign-based MNCs that have operations in our country.
From the pre-budget statement, the key question on whether Malaysia will ever implement GMT, including QDMTT, has now been answered to a certain degree. The two categories of MNCs mentioned earlier should start preparing for this.
Early understanding of the impact of the GMT and preparation will be key to an effective and efficient implementation. These are our recommendations:
> Perform an impact assessment on a group-wide perspective and identify risk areas.
> Identify entities within the group that would be obliged to pay the top-up tax (whether to the Malaysian or foreign tax authorities) and determine the impact on cashflows and functions.
> Assess the impact on dividend distribution to shareholders.
> Quantify potential impact by undergoing a modelling exercise.
> Understand how local authorities in different jurisdictions may respond (for example, whether the group will introduce their own QDMTT or revamp their tax incentive regimes) and analyse the different scenarios.
> Analyse the need to renegotiate tax incentives granted or to replace them with non-tax incentives such as grants. A company in a country that enjoys tax incentives is likely to have an effective tax rate (ETR) below 15%.
However, this does not mean that there will be a top-up tax as one needs to compute ETR on a jurisdictional basis, meaning ETRs of other companies in the same country will also need to be factored in. The significance of economic substance needs to be understood as it is useful to minimise the top-up tax.
> Determine if the present accounting system of the group would be able to generate the data required for the purposes of GMT.
> Be prepared to lodge a GMT filing as this is required regardless of whether there is a top-up tax or not. While the first GMT filing is only due 18 months after the financial year end, there is a critical need to understand the full impact of GMT.
There is no reason for Malaysia not to adopt GMT, as it is just a matter of timing. The MoF’s pre-budget statement has certainly shed some light on Malaysia’s direction.
Upon understanding the impact of GMT, time will be needed to configure the accounting system so that it is able to generate the data required for GMT, followed by a trial run.
All in all, the time is now for affected MNCs to act. A wait and see approach may no longer be tenable.
Tan Hooi Beng and Kelvin Yee are the international tax leader of Deloitte South-East Asia and international tax director of Deloitte Malaysia. The article shares their personal views.
