THE Organisation for Economic Co-operation and Development’s (OECD) Two-Pillar Base Erosion and Profit Shifting (BEPS) 2.0 Project continues to gather steam.
The Global Minimum Tax (GMT) under Pillar Two of the BEPS 2.0 Project, which applies to multinational groups with annual turnovers exceeding 750mil (RM3.5bil), will impose an effective tax rate (ETR) of 15%, applied on a jurisdictional basis.
Where a group pays an ETR of below 15% in any jurisdiction, there will be a top-up tax.
Initially, sceptics felt that it would be impossible for a multilateral tax project of this scale and magnitude to be agreed upon between a critical mass of countries and implemented.
However, 142 countries have now signed-on to support the BEPS 2.0 Project and there have been a flurry of recent developments around the world, including the introduction of GMT legislation.
As such, impacted companies can no longer adopt a “wait and see” approach. They must act immediately to ensure that they are prepared for the implementation of the GMT, which will be implemented in many countries, starting from 2024.
I have shared below some recent developments and have highlighted how companies can start preparing for the GMT. I have generally used the terms “Pillar Two” and “GMT” interchangeably.
Selected developments
Some key developments include:
> On Dec 15, 2022, the Council of the European Union (EU) unanimously adopted a Directive ensuring a GMT for multinational enterprise groups and large-scale domestic groups in the EU.
EU Member States have until Dec 31 2023 to transpose this EU Directive into relevant domestic legislation. The rules will start to become effective for fiscal years starting on or after Dec 31 2023.
The EU has been seen as a leader in the GMT space, and the EU agreement was a significant development which may encourage other countries to accelerate their GMT efforts.
> On Dec 16 2022, Japan released its 2023 tax reform, which includes a proposal to introduce the main component of Pillar Two for fiscal years beginning on April 1 2024 or after.
Other aspects of Pillar Two are also being considered for legislation in the 2024 tax reform.
International developments and feedback will play a role in shaping Japan’s legislation.
> On Dec 20, 2022, the OECD released guidance on safe harbours and penalty relief under the Pillar Two Rules. This follows an earlier public consultation exercise, where stakeholders had raised concerns about the complexity of the rules and called for safe harbours and simplifications. This guidance may prove helpful in simplifying Pillar Two compliance efforts.
> On Dec 20, 2022, Indonesia released a regulation which, among other items, expresses Indonesia’s intention to implement BEPS 2.0, with implementation in 2023.
Further details are expected in the coming months.
> On Dec 31 2022, South Korea enacted new GMT rules, which had earlier been passed by its National Assembly.
In the coming months, it is expected that further legislation will provide more details and possibly introduce safe harbour provisions. The rules will be effective from Jan 1 2024.
During the tabling of the national Budget 2023 on Oct 7, 2022, it was announced that Malaysia would adopt the GMT, including the Qualified Domestic Minimum Top-up Tax (QDMTT) component of the GMT.
The QDMTT will operate such that any top-up taxes arising from a low Group ETR in Malaysia will be paid in Malaysia and not elsewhere.
A detailed study is being undertaken on the implementation of the GMT in Malaysia targeted for 2024.
As there have been various global developments since the October Budget 2022 announcement, further details may be included in the re-tabled Budget 2023, on Feb 24.
What should the impacted companies do now?
The first Pillar Two reporting will be 18 months from the end of the first impacted fiscal year.
With Pillar Two likely to be effective in many countries in 2024, companies may think that they have until 2026 to prepare.
However, this is not the case. For example, if Pillar Two legislation is enacted or substantially enacted in 2023, impacted companies may already need to make certain Pillar Two-related disclosures of countries where the average ETR falls below 15% and of countries that the company expects to pay Pillar Two top-up taxes, in their financial statements for 2023.
Misconception
Another misconception is that Pillar Two is only a concern for the finance team. In fact, departments such as human resources, legal, treasury and others would also be impacted as companies restructure operations in order to prepare for Pillar Two and optimise their tax positions.
In particular, the need for additional data and increased automation would place significant expectations on information Technology departments.
So what should companies do now?
An immediate starting point would be to undertake an ETR impact assessment exercise, to identify jurisdictions in which the ETR is below 15% as well as information and data gaps.
The impact exercise will also enable companies to identify and address complex issues or unclear areas.
Companies with tax incentives which have resulted in a low jurisdictional ETR should consider whether these incentives need to be renegotiated or replaced with incentives which will have a reduced ETR impact, such as grants.
Similarly, companies within the scope of Pillar Two which are expanding to other jurisdictions, should carefully consider the incentives which they would like to request.
It is clear that there is a lot of work to be done, and time is not on our side.
Anil Kumar Puri is Partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
