Andrew Loh
ON Dec 30, 2023, Malaysia enacted law to introduce Pillar Two global minimum tax (GMT) rules for large multinational groups, joining what is now a growing list of more than 30 other countries that have also enacted local versions of the GMT, many of which are already effective in 2024.
Malaysia’s own rules become operational from Jan 1, 2025.
With only months remaining, Malaysian companies that are members of large multinational groups are in a race against time to prepare for the substantial compliance and financial reporting challenges that the GMT presents.
In essence a system of top-up tax rules, the GMT is designed to ensure that multinational groups with annual consolidated revenues of more than €750mil pay at least a 15% effective corporate income tax, calculated based on complex rules, in each country they operate.
This new top-up tax framework represents a significant shift in how taxes are calculated, adding to the already heavy workload of tax departments grappling with new e-Invoicing, indirect tax and capital gains tax rules.
To effectively prepare for GMT, companies need to ensure three critical areas are factored into plans:
> Safe Harbour readiness.
From 2024-2026, a transitional Country-by-Country Reporting (CbCR) Safe Harbour (TCSH) will be available to ease some of the administrative burdens of complying with GMT during the initial years of implementation.
If a group meets one of three straightforward tests for a country for a particular year, no top-up tax will be due under TCSH for that country.
Furthermore, for countries meeting TCSH criteria, the group will not be required to perform full top-up tax calculations, significantly reducing the administrative burden.
However, to access the TCSH, a group must prepare a “Qualified CbCR” using “qualified financial statements”.
The TCSH rules are more stringent than standard CbCR rules.
They generally require groups to consistently use either the accounts prepared for the consolidated financial statements of the ultimate parent entity or separate financial statements for all entities in the same country.
The quality and proactive availability of the group’s CbCR and adherence to TCSH rules will be critical during the transition period.
Groups must invest time to understand these requirements and revise their processes to ensure not only the correct use of data sources, but also the accuracy and reliability of the underlying data.
> Data approach and readiness for jurisdictional calculations.
Although Safe Harbour rules utilise established CbCR data-gathering processes, Pillar Two compliance is significantly more complex.
Computing jurisdictional effective tax rates for GMT filing may require up to 200 data points per entity, significantly exceeding the CbCR requirements.
GMT calculations will be necessary not only for GMT returns, but also for interim and annual tax provisions.
Groups must identify the data sources for each GMT calculation and determine whether they need to modify the existing tax provision processes to accommodate the timely completion of group GMT calculations.
Structured data from accounting or enterprise resource planning systems may be readily available for some, but challenges often arise for headquarter functions that do not receive or lack visibility into individual reporting packages submitted by each subsidiary in the group.
In addition, manual tax provisioning and non-standardised tax reporting can complicate the aggregation of tax data points needed for GMT.
In the short term, a bottom-up approach with each entity contributing to the group’s data collection effort may be more practical than one driven by headquarters.
In the long term, groups should focus on developing a robust, technology-enabled data solution that integrates financial, accounting and tax reporting systems within the Pillar Two framework to facilitate GMT calculations.
> Monitoring Pillar Two developments.
Malaysian-headquartered groups will need to monitor and study the enactment of GMT laws in each jurisdiction in which they operate, since a group’s GMT exposure will likely extend beyond Malaysian rules.
Differences in country rules and the timing of their enactment will impact the measurement of top-up tax liabilities and the entities responsible for payment.
While the Malaysia GMT rules are closely aligned with the Organisation for Economic Cooperation and Development’s (OECD) Two-Pillar Base Erosion and Profit Shifting 2.0 Global Anti-Base Erosion Model Rules, groups should anticipate variations and potential differences in GMT legislation between countries, as well as in the interpretation or application of the OECD’s model rules.
Potential divergences may include choices of top-up tax rules, effective dates when the rules will apply and the mechanics of domestic minimum top-up tax rules, where countries must vary certain provisions in the OECD model rules.
The introduction of GMT in Malaysia is a call to action for large multinational groups to reassess and enhance their tax operating models and infrastructure.
The path to GMT readiness is complex and multifaced, but with proactive planning, diligent monitoring of international developments and investment in robust data systems, companies can successfully navigate these changes.
Andrew Loh is a partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
