Why Board of Directors need to understand Global Minimum Tax
By Tan Hooi Beng, International Tax Leader of Deloitte Southeast Asia and Kelvin Yee, International Tax Director of Deloitte Malaysia
What is Global Minimum Tax (GMT)?
On 14 March, the Organisation for Economic Co-operation and Development (OECD) released the long-awaited technical commentary to the Global Minimum Tax (GMT) rules following its issuance before Christmas last year. GMT is a once-in-a-lifetime global tax reform, meant to end tax competition and profit shifting. It is aimed at ensuring that MNCs pay the right amount of taxes, regardless of where they operate. In this case, 15% has been endorsed. It does not matter if an MNC operates in a low-tax, high-tax, zero-tax country or in a country that offers tax incentives as the minimum tax rate of 15% will kick in.
Who will be affected by GMT?
It 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. Although certain entities such as pension funds and governmental entities are excluded entities, the GMT rules may apply to, amongst others, the sub-groups. It is thus crucial for excluded entities to review their investment structures to ascertain the impact of GMT.
Will Malaysia implement GMT?
While Malaysia is not be a member of the OECD, it is a member of the OECD’s Inclusive Framework. As such, we are expected to adopt and implement the GMT. There is also no reason for Malaysia to avoid the GMT implementation as the taxes that could have been collected here will then be ceded to other jurisdictions.
When can we expect this to be implemented?
The OECD has a very ambitious timeline in GMT implementation. Income inclusion rule (IIR), being the main rule, is to be rolled out in 2023, while the backstop rule - Undertaxed Payments Rule (UTPR) - is targeted to be implemented the following year. All rules operate as “top-up” to a minimum tax of 15%. Malaysia will need to amend its domestic tax legislation to implement this
What is next for large businesses?
It is against this backdrop that the board of directors (BOD) of large MNCs with headquarters in Malaysia, especially those that are listed on Bursa Malaysia, should act on. Early understanding of the GMT impact and preparation will be key to an effective and efficient implementation. These are our recommendations:
- Analyse the impact on a group-wide perspective and identify risk areas.
- Identify entities within the group that would be obliged to pay the top-up tax (whether to the Malaysian or foreign tax authorities) and determine the impact on cash-flows and functions.
- Identify the impact on dividend distribution to shareholders.
- Quantify potential impact by undergoing a modeling exercise.
- Understand how local authorities in the different jurisdictions where the group operates may respond (e.g. whether they will introduce their own domestic minimum tax or revamp their tax incentive regimes) and analyse the different scenarios.
- Analyse if there is a need to renegotiate tax incentives granted or to replace them with non-tax incentives such as grants. A company in a country that enjoys tax incentive is likely to have an effective tax rate (ETR) that is below 15%. However, this does not mean that there will be a top-up tax as one needs to compute ETR on a jurisdictional basis, meaning ETRs of other companies in the same country will also need to be factored in. The significance of economic substance needs to be understood as it is useful to minimise the top-up tax.
- Analyse if the present accounting system of the Group would be able to generate the data required for the purposes of GMT.
- Be prepared to lodge GMT filing as this is required regardless of whether there is a top-up tax or not. While the first GMT filing is only due 18 months after the financial year end, there is a critical need to understand the full impact of GMT.
It is essential for the BOD and key management of large Malaysian-headquartered MNCs with international operations, especially those that are listed on Bursa Malaysia, pension fund and affected governmental entities to move quickly to understand these GMT rules. They are extremely complex, and the challenge of implementation is further compounded by the ambitious deadline set by the OECD. In short, there are two choices - do nothing now and be surprised later or do something now and be in control. In our opinion, the answer is obvious. An effective management of the GMT will be in line with the objective of the Tax Governance that many countries, including Malaysia, are seriously looking at now.