This article first appeared in Forum, The Edge Malaysia Weekly on October 17, 2022 - October 23, 2022

Every reasonable man on the street will endeavour to manage his taxes in the most efficient manner, and the same goes for corporations. Nothing is wrong with that, but when a tax planning exercise becomes overly aggressive, one can expect a reaction from the tax authorities. Certain countries, in their quest to, among others, attract foreign direct investments, would attempt to lower their headline corporate tax or offer generous tax incentives. Again, there is nothing wrong with this. However, profit shifting is imminent given the potential tax arbitrage as a result of the differences in tax regimes around the world. To plug the tax leakages and end the race to the bottom in terms of tax rates, Global Minimum Tax (GMT) was mooted several years ago and has gained momentum ever since.

On Oct 7, the finance minister effectively cleared any doubts on whether GMT is ever coming to Malaysia. The government will introduce a “global minimum effective tax rate” as recommended under Pillar Two of the Base Erosion and Profit Shifting Project, and plans to implement a Qualified Domestic Minimum Top-up Tax (QDMTT) in 2024.

Indeed, this is in line with the implementation progress across the globe by major economies and developing countries.

Suffice to say, the GMT rules are complex in design. However, the core principle is simple: wherever a multinational corporation (MNC) operates, it must pay the right amount of taxes — that is, at 15%. An MNC can operate in a low-tax, high-tax, zero-tax country, or even in a country that offers tax incentives — the universal GMT rules would kick in to ensure 15% tax is paid somewhere in the world.

The operation of the GMT rules, on the other hand, is more intricate. GMT comprises the following tax-collection mechanisms:

•     QDMTT, which imposes GMT top-up tax on local entities and applies in priority. This serves to protect a jurisdiction’s taxing rights. We foresee most countries would seek to implement a QDMTT or similar minimum tax due to this.

•     Income Inclusion Rule (IIR), which allows the ultimate holding company’s jurisdiction to collect GMT top-up tax on foreign subsidiaries which has not been otherwise collected under QDMTT.

•     Undertaxed Payments Rule (UTPR), which acts as a backstop rule to distribute GMT top-up tax among jurisdictions adopting UTPR.

GMT applies to MNCs operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750 million (RM3.4 billion) 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 (mainly those listed on Bursa Malaysia) that have foreign operations, and foreign-based MNCs that have operations in Malaysia. While there are entities that are excluded from the application of GMT, such as pension funds and government entities, an excluded entity that is the ultimate holding company could still bring its investments into the scope of GMT rules.

•     A headline tax of 15% and above does not mean the effective tax rate (ETR) under GMT would also be 15% and above. This can be due to the tax profile of a company, the tax incentives offered in a jurisdiction and the complex adjustments required under the GMT rules.

•     Loss-making entities could still give rise to top-up taxes under GMT due to one of the special rules and this may not be as uncommon a situation as expected.

•     Tax incentives could be rendered ineffective or less beneficial, but this depends on a number of other factors. For example, the ETR is calculated on a country-by-country basis, and the higher-taxed incomes of other companies in the same country will also be factored. Additionally, economic substance would be useful in minimising top-up tax.

•     The information for Country-by-Country Reporting (CbCR) would not be sufficient for GMT filing, although some information could still be useful. MNCs may also need time to assess the availability of all the data required for GMT.

•     As the GMT rules take into account deferred tax assets (DTA) in the ETR calculation, a negative tax expense could result in a negative ETR. Based on the existing GMT rules, it appears that a negative ETR could lead to a top-up tax percentage that is more than 15%.

With the announcement made in Budget 2023, one can foresee that GMT is here to stay. The two categories of MNCs mentioned earlier should begin preparing now. Early understanding of the impact of GMT and preparation will be key to an effective and efficient implementation.

These are the top priorities for MNCs to navigate this unprecedented global tax reform:

•     Perform impact assessment from a group-wide perspective and identify risk areas.

•     Quantify potential impact, including cash flow and tax incentive that is currently being enjoyed, by undergoing a modelling exercise.

•     Analyse if the present accounting system(s) of the group would be able to generate the data required for the purposes of GMT.

•     Configure the accounting system(s) to ensure GMT data can be generated, followed by a trial run.

•     Prepare to lodge GMT filing as this is required regardless of whether there is a top-up tax or not.

The Ministry of Finance’s statement on GMT demonstrates the Malaysian government’s commitment to be part of the global tax ecosystem. Affected MNCs, including the Malaysian-headquartered ones, should act now as 2024 is not far away. Upon understanding the impact of GMT, time will be needed to assess MNCs’ GMT readiness, and determine the resources required for its implementation. Thus, early preparation will reduce the uncertainties of the impact of GMT on the MNCs’ operations and cash-flow management, both being the crucial components in ensuring the enduring success of MNCs.

Tan Hooi Beng is international tax leader and Ashley Lim is tax associate at Deloitte Malaysia

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.