The winding road to a 15% global minimum tax
THE Organisation for Economic Co-operation and Development’s (OECD Two-pillar Base Erosion and Profit Shifting (BEPS) 2.0 Project has had more plot twists than a John Grisham novel, with refinements in rules, delays in implementation, countries disrupting the implementation rhythm and the star of the show leaving before the grand finale.
The World Bank has also jumped on the bandwagon, recently releasing a report on the policy considerations, implementation options and next steps for the global minimum tax (GMT) under Pillar Two.
To re-cap, Pillar Two, which applies to multinational groups with annual turnovers exceeding 750mil, aims to impose an effective tax rate (ETR) of 15%, applied on a jurisdictional basis.
Where a group pays an ETR of below 15% in any jurisdiction, there will be a top-up tax elsewhere. Pillar One, which is not the focus of this article, seeks to re-allocate the taxing rights over part of the profits of multinational groups with annual
20bil turnovers exceeding (Rm91bil) and profits exceeding 10%, to the jurisdictions in which their customers are located.
The OECD had initially sought to implement the GMT in 2023.
However, there is still work to be done, and most countries only plan to implement the GMT in 2024 or later. This is certainly not unreasonable – with its complexity and the need for buy-in from a critical mass of jurisdictions, a 2023 implementation always seemed extremely optimistic.
What are some other countries doing?
All eyes have been on the European Union (EU) and the United States, which are seen as leaders in the GMT space.
The EU seeks to implement the minimum tax by way of an EU directive, starting from the financial years beginning on or after 31 December 2023 (effectively, 2024).
An EU directive requires unanimity from all 27 EU member states. Initially, Poland expressed reservations on the directive but changed its position on June 17, 2022. In a dramatic twist, Hungary then took Poland’s place in opposing the directive. This resulted in the United States stating in July this year that it would terminate its tax treaty with Hungary.
Despite the United States being vocal in its support for a GMT, it has not been able to push Pillar Two through its political process, and some compromises have had to be made. On Aug 16, 2022, US President Joe Biden introduced a 15% “corporate alternative minimum tax” (CAMT) for US corporations with profits over Us$1bil. The CAMT will apply to tax years beginning after Dec 31, 2022. The US CAMT is not in line with the Pillar Two architecture and it remains to be seen what issues this will cause.
Further delays to the global implementation may result in unilateral GMT adoption by individual countries. A recent joint statement by the governments of France, Germany, Italy, the Netherlands and Spain said that even if there is no unanimity in the EU, they are ready to implement the GMT in 2023 “by any possible legal means”.
They have not, however, confirmed when in 2023 they might seek to move and have strongly expressed that they are still hopeful of unanimous adoption throughout the EU.
Unexpected changing of the guard at the OECD
On Sept 5, 2022, the director of the OECD’S centre for tax policy and administration Pascal Saintamains, announced that he would be leaving at the end of October 2022. Saint-amains has been at the OECD for 15 years and is widely recognised as the face of the BEPS and BEPS 2.0 projects.
He will be succeeded by his deputy Grace-pere Navarro, who herself will retire just five months after taking on the role.
Crucial time
There is concern that these leadership changes at such a crucial time will disrupt the GMT implementation. Saint-amains has dismissed these concerns, stating that he is able to leave because the Two-pillar deal has progressed well, and he is confident that it will be implemented. What is Malaysia’s position? The Ministry of Finance (MOF) indicated in its 2023 pre-budget statement released on June 3, 2022 that it is reviewing the technical details of the two pillars, including the introduction of the Qualified Domestic Minimum Top-up Tax (QDMTT) under Pillar Two.
If Malaysia introduces the QDMTT, this means that impacted groups will pay a 15% minimum tax in Malaysia, hence ensuring that any top-up tax is collected in Malaysia and we will not cede taxing rights to other countries. Malaysia’s seriousness in implementing the GMT was reinforced by the release of a Public Consultation Paper (PCP) on Aug 1, 2022, with the consultation period ending on Aug 15, 2022.
Given the complexity of Pillar Two, since there are still many areas of uncertainty and because further guidance (including the implementation framework) is still awaited from the OECD, it is important not to rush into GMT implementation.
The MOF should take into consideration all the responses to the PCP and monitor how other countries, including our Asean and Asiapacific neighbours, are reacting.
Investor-friendly
Above all, Malaysia must continue to position itself as an investor-friendly jurisdiction, with tax incentives and a business climate which continue to promote investment whilst allowing investors the flexibility they will need after the implementation of the GMT.
We hope that Budget 2023 will lay out a clear roadmap for Malaysia’s GMT implementation, without rushing towards an early implementation date. A roadmap and sufficient time for preparation will provide investors with clarity and certainty during these otherwise turbulent times.