GMT – A Wake-up Call for CFOs

What is Global Minimum Tax (GMT)?

GMT is arguably the largest tax reform in history. Large multinational corporations (MNCs) will need to pay a minimum tax of 15% in every country in which they operate. In essence, an MNC is free to operate in high or low-tax jurisdictions, tax havens, and countries that offer a generous tax holiday. In the end, corporations need to pay taxes at 15%. 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. Even if no top-up tax is required, various compliance obligations need to be met.

Who would be affected in Malaysia?

Large Malaysian-headquartered corporate groups especially the listed ones, including the pension fund and certain government entities as well as inbound investments of large foreign-based MNCs are likely to be affected. Any top-up tax to 15% will be collected under the Qualified Domestic Minimum Top-Up Tax (QDMTT), followed by the Income Inclusion Rule (IIR) and finally the Undertaxed Profits Rule (UTPR), all of which operate on highly complex mechanisms.

Who is responsible for GMT?

Since GMT is a form of taxation, the knee-jerk reaction is that the tax division must be responsible. This should not be the case as GMT factors into various accounting rules and most of the data owners for GMT are finance and accounting personnel. Additionally, in a large organisation, the efficacy of data collection would also depend on the effectiveness of its accounting system. It is therefore imperative to establish a GMT project steering committee comprising of leaders from tax, accounting, finance, and information technology, chaired by the group CFO, and supported by external tax advisors. In short, only a well-coordinated approach will ensure a successful GMT implementation.

When will Malaysia implement GMT?

While certain countries such as Singapore, Hong Kong, and Thailand have deferred their implementation to 2025, others such as Korea, the United Kingdom, Japan, Australia, Canada, European Union, Switzerland, and others have chosen 2024 as their starting year. As we wait for a firmer announcement from the Malaysian government, it is important for taxpayers to prepare for any eventuality, including a 2024 implementation, which could well be the case as no government is keen to concede its taxing right to others.

International Accounting Standard (IAS) 12

The amendments to IAS 12 have been finalised by the International Accounting Standard Board on 23 May 2023 to take into account GMT top-up taxes. These are the 3 key components of the amendments:

1. Firstly, there is a mandatory exception to deferred tax recognition and disclosures arising from GMT.
2. Next, current taxes arising from GMT should be disclosed separately.
3. Lastly, disclosure of qualitative and quantitative information about an entity’s exposure to GMT is required, even for periods in which the GMT legislation is enacted or substantively enacted, but not yet in effect. This could be as early as the financial year beginning on 1 January 2023.

Component 3, which represents the earliest financial reporting requirement of an in-scope MNC, is the most urgent component. For a December year-ended listed MNC group, this means that its financial report for the year ending on 31 December 2023 may need to reflect potential GMT exposure in the subsequent financial year, which needs to be ready by April 2024 (less than a year from now). Fortunately, the information does not need to reflect all the specific requirements of the GMT legislation and can be provided in an indicative range. To the extent 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, listed groups would need to consider the impact on stakeholder confidence where information is not known or reasonably estimable.

Can Information in the Country-by-Country Report (CbCR) be Repurposed for GMT?

MNCs that are under the CbCR regimes are highly likely to be impacted by GMT. Unfortunately, CbCR information is insufficient for GMT calculations and reporting. Given the complexity of the rules and time constraint, the Organization for Economic Co-operation and Development (OECD) has agreed on 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 3 years if one of the 3 tests is met. While this comes as a great relief, some potential challenges in relying on the TSH are often overlooked.

For example, what would the ramifications be if a jurisdiction fails to qualify for TSH in 2024 contrary to the earlier forecast? In this situation, what does the group do in terms of data and technical readiness? TSH may also result in complications to transitional rules such as restrictions on deferred tax assets. Moreover, there will be an inconsistent GMT application across the group as not all jurisdictions could rely on TSH.

CFOs to Stay Alert

CFOs must be prepared to provide answers on GMT. Before the board of directors, shareholders, and other stakeholders, the CFO must be able to state clearly where the group stands in terms of readiness and financial impact. Issues on which countries are at risk of top-up tax, the ability to rely on TSH, the efficacy of tax holidays, data readiness, and other concerns must be adequately dealt with. The ability to disclose according to IAS 12 requirements is an acid test for the readiness of a group for GMT. For those who adopt the wait-and-see approach, it is time to reconsider as 31 December 2023 is fast approaching. Under no circumstances should a CFO say that a group is about to assess the impact of GMT come this December. It should and must have been done.

Tan Hooi Beng is the Deputy Tax Leader of Deloitte Malaysia and International Tax Leader of Deloitte Malaysia and Southeast Asia. The above views are his own.

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