This article first appeared in The Edge Malaysia Weekly on October 7, 2024 - October 13, 2024

WITH the tabling of Budget 2025 just around the corner, all eyes are on the government’s expected implementation of the global minimum tax (GMT) on Jan 1, 2025, and what this will mean for Malaysia’s ability to maintain its competitive edge as an investment destination.

On that day, the country will adopt the OECD Global Anti-Base Erosion (GloBE) Model Rules under Pillar Two — a set of international tax rules that is aimed at preventing multinational enterprise groups (MNEs) from shifting profits to low-tax jurisdictions to avoid paying their fair share of taxes and setting the global minimum tax rate of 15% — and implement a Domestic Top-Up Tax (DTT), which spells out the tax that will be imposed on an MNE in a jurisdiction where its global effective tax rate falls below the minimum set by GloBE rules.

This is based on the two pillars of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the international initiative launched in 2013 by the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) major economies aimed at addressing tax challenges posed by globalisation.

Pillar One provides taxing rights to market jurisdictions to part of the residual profits earned by MNEs with an annual global turnover exceeding €20 billion and 10% profitability, while Pillar Two requires MNEs with an annual global turnover exceeding €750 million to pay at least 15% tax, regardless of where they are headquartered or the jurisdictions they operate in.

So, governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits. In other words, if the effective tax rate of the MNE in the jurisdiction is 10%, the rules allow for the recovery of the balance 5% as top-up tax.

Head of tax at KPMG in Malaysia, Soh Lian Seng, tells The Edge that the GMT will have a significant impact on MNEs benefiting from incentives in Malaysia due to the GLoBE Rules. 

“Malaysia’s appeal as an investment destination could be affected if alternative incentives or strategic tax reforms are not introduced. Without these measures, MNEs may rethink their supply chain structures, potentially relocating to jurisdictions that can offer more favourable tax conditions while complying with Global Minimum Tax rules,” Soh says.

“One important development that may influence how jurisdictions compete on tax is the permission given to their governments to create Qualified Domestic Minimum Top-up Taxes (QDMTT),” says the Socio Economic Research Centre’s (SERC) executive director Lee Heng Guie.

“Without a QDMTT, that revenue would go to another country as determined by the Pillar Two rule order, which requires MNEs with an annual global turnover exceeding €750 million to pay at least 15% tax, regardless of where they are headquartered or the jurisdictions they operate in,” he explains.

Lee adds that several countries, including Hong Kong and Singapore will implement the QDMTT regime in 2025, while Switzerland did so in January this year, as it will ensure that any top-up tax rate due from entities located in the tax jurisdiction country goes directly to its tax collection agency.

It is worth noting that while certain countries such as Singapore, Hong Kong and Thailand have deferred their implementation of the GMT to 2025, others such as South Korea, the UK, Japan, Australia, Canada, European Union and Switzerland have chosen 2024 as their starting year.

“It remains to be seen if [Putrajaya] will introduce any mitigating measures in Budget 2025, especially as other countries are already taking proactive steps to cushion the impact on their competitive edge,” says KPMG’s Soh.

He observes that Singapore, for one, introduced in its Budget 2024 the Refundable Investment Credit (RIC) scheme to boost its appeal to high-value investments. The RIC is awarded on qualifying expenditures incurred by a company in respect of a qualifying project for up to 10 years. The credits are to be offset against corporate income tax payable. Any unused credits will be refunded in cash within four years from when the company satisfies the conditions for receiving the credits.

“This initiative offers businesses up to 50% support on each qualifying expenditure category with a period of up to 10 years [and is hoped to] enhance Singapore’s position as an investment hub,” says Soh.

Similarly, Thailand and Vietnam are setting up support funds for affected MNEs. Thailand’s Competitiveness Enhancement Fund (CEF) is designed to subsidise targeted industries, Soh says.

“In March 2023, the Thai cabinet tasked the Board of Investment (BoI) to amend the National Competitiveness Enhancement Act to channel funds collected from the top-up tax under Pillar 2 into the CEF, in anticipation of potential challenges arising from the BEPS 2.0 implementation in Thailand,” he notes.

“Vietnam is also moving forward with plans to establish an Investment Support Fund (ISF), which will be financed by top-up tax collections under Pillar 2. Vietnam is a critical manufacturing base for major international tech players, and is heavily reliant on foreign investment for growth. Companies with foreign investment reportedly account for about 70% of its growth.

“The ISF will provide cash support, exempt [eligible MNEs] from corporate income tax in areas such as R&D, training and human resource (HR) development, investment in fixed assets, high-tech manufacturing and social infrastructure. Eligible entities will be subject to a review and approval process involving multiple authorities and the prime minister’s financial decision,” says Soh.

“In view of these initiatives taken by neighbouring countries, it will be interesting to see if similar strategies are adopted to maintain Malaysia’s competitive edge as a prime investment destination for both foreign and local investors.”

Deloitte Malaysia country tax leader Sim Kwang Gek adds that it will be crucial to allow flexibility for businesses impacted by the GMT to negotiate tax incentives that can be customised to the profile of the investment.

As the SERC’s Lee puts it: “From the tax competitive perspective, Malaysia could lose its competitive edge to attract FDI (foreign direct investment) but this can be compensated for by other non-tax factors — good investment climate and better investment facilitation, good governance as well as a predictable regulatory environment, backed by credible economic and financial policies and stable political conditions. In addition, the supply of productive and skilled manpower as well as the provision of excellent software and hardware infrastructure should enhance our nation’s competitiveness.

“With the overhaul of fair international tax rules between different countries’ jurisdictions, it helps to recoup some of the revenue lost due to the exploitation of the gaps and mismatches in tax rules. Many governments have limited fiscal space for decades and hence, the sweeping changes to tax rules come in handy for repairing the budget deficits.” 

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