IN the upcoming Budget 2024 announcement on Oct 13, global minimum tax (GMT) is among the key tax proposals expected to be announced regardless of when Malaysia chooses to begin.
While certain countries such as Singapore, Hong Kong and Thailand have deferred their implementation to 2025, others such as South Korea, the United Kingdom, Japan, Australia, Canada, European Union and Switzerland have chosen to start in 2024.
A quick round-up of GMT updates
GMT was conceived to ensure large multinational corporations (MNCs) pay a minimum effective tax rate of 15% in every country in which they operate.
This new “low” for effective corporate taxation will affect MNCs operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750mil in at least two of the four immediately preceding fiscal years.
Any top-up tax to 15% will be collected under the qualified domestic minimum top-up tax, followed by the Income Inclusion Rule and finally the Undertaxed Profits Rule (UTPR), all of which operate on highly complex mechanisms.
The Model Rules for GMT, along with the Commentary and subsequent Administrative Guidance, have been released by the Organisation for Economic Co-operation and Development (OECD) since December 2021, and an embedded “common approach” rule dictates that implementing countries should apply GMT in a consistent manner.
As such, Malaysia’s implementation of GMT is not expected to deviate from the Model Rules.
Nonetheless, careful monitoring is required as the OECD’s Commentary and Administrative Guidance on numerous aspects such as foreign currency conversion and adjustments undertaken upon consolidation makes it clear: the rules are by no means simple, and the data requirements for GMT calculations are such that one may not simply rely on the local financial accounts.
CFO alert: Tax and financial reporting requirements converge
Cognisant of the complexity of the GMT and the time constraint, the International Accounting Standards Board (IASB) has amended IAS 12 on May 23, 2023 to take into account GMT top-up taxes.
Below are some of the key changes that finance and tax personnel would need to consider in preparing the financial year 2023 (FY23) and FY24 financial accounts:
> Mandatory exception to deferred tax recognition and disclosures arising from GMT.
> Current taxes arising from GMT should be disclosed separately.
> Disclosure of qualitative and quantitative information about an entity’s exposure to GMT for period(s) in which GMT legislation is enacted or substantively enacted, but not yet in effect. This could be as early as the financial year beginning on Jan 1, 2023.
Component 3 represents the earliest financial reporting requirement of an in-scope MNC. For a December year-ended MNC group, its financial report for the year ending on Dec 31, 2023 may need to disclose the potential GMT exposure, assuming 2024 is the start year.
The silver lining is that the information does not need to reflect all the specific requirements of GMT legislation and can be provided in an indicative range.
Additionally, to the extent that information is not known or reasonably estimable, an entity shall instead disclose a statement to that effect and disclose information about the entity’s progress in assessing its exposure.
Nonetheless, groups with public accountability would need to consider the impact on stakeholder confidence where information is not known or reasonably estimable.
Does Country-by-Country Report (CbCR) information save the day? At this juncture, chief financial officers (CFOs) are keen to know if readily available information and reporting processes for CbCR can be leveraged for GMT purposes.
In this regard, it is no overstatement to say that CbCR information is insufficient for GMT calculations and reporting.
However, given the complexity of the rules and the short window of preparation time before the GMT is effective, the OECD has agreed upon Transitional CbCR Safe Harbours (TSH) to ease taxpayers’ transition into the GMT regime.
In a nutshell, GMT liability would be deemed zero in a jurisdiction for up to three years if any of the three tests are met, namely the de minimis test, the simplified effective tax rate test, and the routine profits test.
While this comes as a great relief to many taxpayers, the strings attached to the giftbox are often overlooked. CFOs should consider both the benefits and potential challenges in relying on the TSH:
> What are the ramifications if the financial results come 2024 (assuming this is the start year) run contrary to the earlier forecast in determining TSH applicability, and the jurisdictions fail to qualify?
Would these jurisdictions be data-ready and technically ready to generate GMT calculations and fulfill the reporting requirements?
> While qualifying jurisdictions may rely on the TSH to nullify top-up taxes payable, has the group considered the application of the GMT transitional rules which are effective from Nov 30, 2021 up to the transition year for the jurisdictions?
The restrictions on certain deferred tax assets generated and the value used for intragroup asset transfers would apply throughout the extended transitional period as a result of the TSH application.
In addition, relying on the TSH would mean forgoing the Transitional UTPR Safe Harbour, which exempts the application of UTPR that begin on or before Dec 31, 2025.
> Lastly, the C-suite of any large MNC would need to consider the overall transformation plan for GMT implementation.
Electing TSH application for certain jurisdictions would mean a staggered shift towards full GMT readiness globally, as some jurisdictions would need to be equipped for full GMT calculations and reporting requirements ahead of time, whereas others may resist rapid changes on the basis of TSH applicability for up to three years.
CFOs should keep a close eye on the clock
An often-asked question: who is responsible for GMT? Contrary to the expectation that the tax division should be responsible, the main data owners for GMT calculations are the accounting and finance divisions, as GMT is built upon financial accounting concepts.
Of course, an effective accounting system will facilitate compliance as well.
Hence, to ensure the success implementation of GMT, a project steering committee could be established and should comprise of leaders from accounting, finance, tax and information technology, chaired by the group CFO.
Support can be attained from external tax advisers if need be.
In light of the disclosure requirements of IAS 12 and the new data requirements, affected MNCs should begin the GMT impact assessment now to ensure a graceful transition into the GMT regime.
MNCs may need to assess the implications of GMT on the group’s cash flows, dividend payout, and tax incentives, as well as the potential need for additional resources or technological solutions.
Year 2024, assuming this is the start year, is little over three months away, and the global GMT implementation progress is unlikely to be “snoozed”.
Indeed, Malaysia may well align its timeline with the major economies and implement GMT in 2024. With an eye on the clock, CFOs would need to rise to the challenge and prepare for GMT.
Kelvin Yee and Ashley Lim are director and senior associate of the International Tax Services Group of Deloitte Malaysia. The views expressed here are the writers’ own.
