Come what may, Global Minimum Tax is imminent

If Malaysia does not implement GMT, the top-up taxes (15% - 0%) will be collected by other countries that implement GMT. Another example is a situation where there is a lowly taxed Malaysian subsidiary of a foreign headquartered MNC.

Come what may, Global Minimum Tax is imminent
Kelvin Yee and Tan Hooi Beng

By Tan Hooi Beng, International Tax Leader of Deloitte Malaysia and Southeast Asia and Kelvin Yee, Director of Deloitte Malaysia

Does the dissolution of Parliament affect the Global Minimum Tax (GMT)?

Global Minimum Tax (GMT) and Qualified Domestic Minimum Top-Up Tax (QDMTT) were mentioned in the Budget 2023 Speech on 7 October. However, Parliament was dissolved on 10 October. QDMTT is part of the GMT’s overall framework. Does the dissolution affect the GMT plan? The answer to this - absolutely not.

The reason is simple - GMT is an international taxation agenda. The top-up taxes are on the table. If Malaysia does not implement it, the taxing right would be ceded to other countries. Hence, there is no reason for Malaysia not to do it. So, unlike GST, capital gains tax or inheritance tax, implementing GMT is key to upholding Malaysia’s tax sovereignty.

Our view is in line with what has been said by the incumbent Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz at the 51st Study Group on Asia-Pacific Tax Administration and Research (SGATAR) Annual Meeting 2022 yesterday, that is GMT is expected to be implemented in 2024.

Is Malaysia in a rush?

While some feel that Malaysia need not rush into announcing these and be the so-called “first mover”, we are of the view that this announcement is apt and timely. GMT was mooted several years ago and have since gained momentum. Many affected taxpayers, including the Malaysian groups that are listed on Bursa Malaysia and foreign direct investors would certainly be keen on Malaysia’s direction.  We can of course expect more details on GMT and QDMTT to be available in due course.

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What exactly is GMT and who will be affected?

Simply put, GMT at 15% is the new “low” for effective corporate tax rate for large multinational corporations (MNCs). Wherever an MNC operates, it must pay the right amount of taxes – that is, at least 15%. An MNC can operate in low-tax, high-tax, zero-tax country or in a country that offers tax incentives, the universal GMT rules would kick in to ensure 15% tax is paid somewhere in the world.

GMT applies to MNCs operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750 million in at least two of the four immediately preceding fiscal years.

A number of Malaysian listed groups, the pension fund and government entities could be affected directly or indirectly as well as inbound investments of large foreign-based MNCs. Any top-up tax to 15% will be collected under QDMTT, followed by Income Inclusion Rule (IIR) and finally the Undertaxed Profit Rule (UTPR) which all are highly complex.

Why Malaysia needs to jump on the bandwagon?

Malaysia will cede the taxing right to other countries if GMT is not adopted. For example, a Malaysian-based listed company has an operating subsidiary in country X that enjoys tax exemption for 10 years.

If Malaysia does not implement GMT, the top-up taxes (15% - 0%) will be collected by other countries that implement GMT. Another example is a situation where there is a lowly taxed Malaysian subsidiary of a foreign headquartered MNC.

Unless Malaysia adopts GMT, in particular QDMTT, the top-up tax to 15% will be ceded to a jurisdiction where the parent company is. Since the money is on the table, we believe that implementing GMT is essential and not an option for Malaysia. The design of QDMTT can be complex task where control foreign corporation rules of other countries need to be considered.

What is next for affected MNCs?

We expect that GMT rules would start to apply to affected MNCs from financial years that begin on or after 1 January 2024. Whilst the first GMT return will only be due much latter, an early understanding of the impact of GMT and preparation will be key to an effective and efficient implementation.

We recommend MNCs to undertake impact assessment from a group-wide perspective and identify risk area as well as to analyze if the present accounting system(s) of the Group would be able to generate the data required for the purposes of GMT. The configuration of the accounting system(s) to ensure GMT data can be generated will take time. The efficacy of tax holiday currently being enjoyed needs to be reviewed.

GMT is not an option per se and hence Malaysia’s statement on GMT demonstrates the Malaysian government’s commitment to be part of global tax ecosystem.

For taxpayers, the time to act on this is now.