This article first appeared in Forum, The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

The question of when the global minimum tax (GMT) will be implemented in Malaysia has been on our minds for months. It was expected that 2024 would be the year and many have started to prepare for that eventuality. However, it was revealed at the recent Budget 2024 announcement that the tax is only expected to be implemented in 2025.

This means multinational enterprises (MNEs) with a financial year end beginning on or after Jan 1, 2025, will be the first group to be affected. With this, the knee-jerk reaction is that there will be some breathing space for the affected MNEs, given that there are more than 12 months to prepare. Is this really the case?

Before dealing with this perceived “breathing space”, let us recap what GMT is. It is arguably the largest tax reform in history. It was conceived with the objective of setting a floor to corporate taxation. Ultimately, large MNEs will need to pay a minimum effective tax rate (ETR) of 15% in every country where they operate. This new “low” for effective corporate taxation will affect multinational corporations (MNCs) operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750 million (RM3.7 billion) in at least two of the four immediately preceding fiscal years.

The ETR for the purpose of GMT is a unique one that is calculated on a jurisdictional basis, involving extensive adjustments. If the MNC group’s ETR in a jurisdiction is below 15%, a top-up tax may be imposed by foreign jurisdictions via the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). The IIR and UTPR are also known as the Global Anti-Base Erosion Model (GloBE) Rules.

Instead of ceding the right to tax to other countries, a jurisdiction may implement a qualified domestic minimum top-up tax (QDMTT) regime, which grants itself the right to collect top-up taxes in respect of the entities located in its jurisdiction. Any top-up tax up to 15% will be collected under the QDMTT, followed by IIR and finally the UTPR — all of which operate on highly complex mechanisms. Even if there is no additional top-top up tax, the compliance obligations are massive and mammoth preparation is required.

The Organisation for Economic Co-operation and Development (OECD) had a very ambitious plan, which was to implement GMT in 2023. Clearly, this was not realistic as countries were trying to implement an extremely complex international tax rule. The plan has since been deferred to 2024. Countries have the option to adopt it in 2024, thereafter, or not at all. However, we believe that most countries will likely adopt it. It is only a matter of time. Doing nothing may not be an option as the right to tax will then be ceded to others.

Economies such as the European Union, Canada, the UK, Australia, New Zealand, Switzerland, Vietnam, Japan and South Korea will introduce GMT in 2024. Even traditional tax haven jurisdictions such as the Bahamas, British Virgin Islands and Barbados are examining GMT implementation, with some like Mauritius, the Isle of Man, Guernsey and Jersey already announcing plans to implement it. At the same time, there are ongoing developments in the US, and we anticipate that GMT will be implemented there at some point. Interestingly, economic powerhouses like Brazil, Russia, India and China have not made any formal announcements.

Meanwhile, some countries, such as Thailand, Singapore and Hong Kong have deferred this to 2025, with Malaysia also jumping on the 2025 bandwagon. We are sanguine that Malaysia has evaluated the pros and cons of implementing GMT in 2025, with this decision made in the best interests for our beloved nation.

GMT will apply to large MNEs that operate in Malaysia and elsewhere. Depending on where they operate, the level of urgency would differ. For example, if a large Malaysian listed group operates only in Malaysia, GMT is not applicable. Where Malaysia-based MNEs operate only in Malaysia and countries that will implement GMT in 2025, there could be some breathing space, but this will depend on whether the GMT law in Malaysia and those countries are regarded as being substantially enacted in 2023. If so, some form of disclosure in the financial reports for 2023 would still be required, although a limited one. In addition, for the period when GMT is in effect, MNEs should ensure that GMT provisions and the necessary disclosures for both quarterly and annual reports are properly done.

Where Malaysia-based MNEs operate in Malaysia and countries that implement GMT in 2024 such as the UK, there are already GMT issues that need to be dealt with immediately. An impact assessment on the potential top-up tax there given the local QDMTT in those countries as well as disclosures in the financial reporting in 2023 under the relevant accounting standards would be necessary. Analysis on data readiness may also be carried out.

Regardless of whether it is 2024 or 2025, Malaysian subsidiaries of foreign-based MNCs would need to start assessing GMT implications on the tax incentives they enjoy in Malaysia. Likewise, GMT needs to be considered in new applications for tax holidays in Malaysia. The level of economic substance which would cushion the impact of GMT needs to be factored in. The breathing space, if any, is temporary as a host of things need to be done, such as impact assessment, data readiness, tax provisions, financial disclosures, impact on tax incentives and tax compliance. Hence, MNEs that have already commenced preparations for GMT would be better positioned to manage their GMT affairs.

GMT is very complex. A good grasp of the rules is essential. There is a need to monitor global developments to ensure the GMT positions of affected MNCs are being adequately dealt with in a timely manner.

To date, it has been a fulfilling journey for us as we support the relevant MNEs in various phases of GMT. Similar to how learning is a life-long journey, there is thus no need to hastily automate systems to manage GMT. The understanding of the rules by the tax and accounting personnel (including the account consolidation team) is the right starting point. A proper GMT workshop is useful so that the GMT theory and types of data required can be fully understood.

The next step is a data diagnostic review and impact assessment. A proper impact assessment that includes the Transitional CbCR Safe Harbour will enable MNEs to gauge the overall impact of GMT on the MNEs, including data readiness and disclosure requirements in the financial reporting. Accounting personnel, especially those from the accounting consolidation team, play a vital role. Understanding the accounting consolidation adjustments and determining which items should be traced to the respective entities is paramount.

Who is responsible for GMT? To a certain extent, GMT is accounting-driven, since the primary owners of the data used to calculate the tax come from the accounting and finance divisions. To ensure the successful implementation of GMT, a project steering committee can be established, comprising leaders from accounting, finance, tax and IT, with the group chief financial officer serving as chair. If necessary, support can be sought from external tax advisers. As time is of the essence, CFOs must rise to the challenge and prepare for GMT.

Tan Hooi Beng is international tax leader at Deloitte Southeast Asia and James Cheang is international tax manager at Deloitte Malaysia

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