GMT in 2025 - Is there a breathing space?

In the Malaysian Budget 2024, the Global Minimum Tax (GMT) is expected to be implemented in 2025. This means that multinational enterprises (MNEs) with year-end beginning on or after 1 January 2025 will be the first group to be affected. Will there be a breathing space for the affected MNEs?

Budget 2024 – What was announced?

The question of when Global Minimum Tax (GMT) will begin 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 recently announced Malaysian Budget 2024 that for Malaysia, the GMT is expected to only be implemented in 2025.

This means that multinational enterprises (MNEs) with year-end beginning on or after 1 January 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?

A quick recap on GMT

Before dealing with this perceived “breathing space”, let us recap on what GMT is. GMT 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 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.

The ETR for GMT purpose 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%, top-up taxes 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 taxing right to other countries, a jurisdiction may implement a Qualified Domestic Top-Up Tax (QDMTT) regime, which grants itself the right to collect top-up taxes, in respect of entities located in its jurisdiction. Any top-up tax 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 initial plan

The Organisation for Economic Co-operation and Development (OECD) had a very ambitious plan that 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 taxing right will then be ceded to others.

What is happening around the globe?

Economies such as the European Union, Canada, United Kingdom, Australia, New Zealand, Switzerland, Vietnam, Japan and South Korea will introduce GMT in 2024. Even traditional tax havens jurisdictions such as Bahamas, British Virgin Islands and Barbados are examining GMT implementation, with some like Mauritius, Isle of Man, Guernsey and Jersey already announcing plans to implement it. At the same time, there are also ongoing developments in the United States, 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 like 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 doing the GMT in 2025, with this decision made in the best interest for our beloved nation.

Is there really a breathing space?

GMT will apply to large MNEs that operate in Malaysia and elsewhere. Depending on the where they operate, the level of urgency would differ. For example, a large Malaysian listed group operates only in Malaysia. GMT is not applicable. Where Malaysian-based MNEs operate only in Malaysia and countries that will implement GMT in 2025, there could be a slight breathing space, but this will also 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, albeit 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 disclosed.

Where Malaysian-based MNEs operates in Malaysia and countries that implement GMT in 2024 such as the United Kingdom, 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 need 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, for MNEs that have already commenced preparation for GMT, they would be better positioned to manage their GMT affairs.

Our Journey So Far

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 and 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 Transitional CbCR Safe Harbours will enable MNEs to gauge the overall impact of GMT to the MNEs, including data readiness and disclosure requirement 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.

The Way Forward

Who is responsible for GMT? To a certain extent, GMT is accounting-driven, since the primary owners of the data used to calculate GMT 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 information technology, with the group CFO serving as Chair. If necessary, support can be sought from external tax advisors. As time is of the essence, CFOs must rise to the challenge and prepare for GMT.

Tan Hooi Beng is the International Tax Leader of Deloitte Southeast Asia and James Cheang is the International Tax Manager of Deloitte Malaysia. The above views are their own.

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