Global minimum tax – What does it mean for us?

WHILE we do not know when the Covid-19 pandemic will be over, international tax rules continue to evolve.

On June 5, 2021, the Group of Seven (G7) finance ministers met mask-to-mask in London, and announced the high-level political agreement on global tax reform.

This included the reallocation of a share of the global residual profit of certain businesses to market countries (Pillar One), and a minimum effective tax rate (METR) in each country where a business operates, of at least 15% (Pillar Two).

Pillar One is necessary to ensure a fairer allocation of profits to the market jurisdictions.

Traditionally, market jurisdictions are not able to tax the profits of the service providers that do not have physical taxable presence in the former.

With the advancement of technology, services could be rendered anywhere in the world. Under Pillar 1, Us$100bil (Rm411bil) of taxes are expected to be redistributed and hopefully, Malaysia would benefit from this.

For Pillar Two concerning METR, it’s important to note that 15% is not the ascertained rate. Instead, it’s just the starting point. The language used is “at least”, driven by France who fought for a higher rate. Pillar Two will not materialise without the blessing of the United States.

A hope for global consensus is renewed under the Biden administration. US President Joe Biden contemplated 21%, but revised it to 15%. This is a very clever move by Washington in its effort to raise the Global Intangible Low-taxed Income, as well as the US corporate tax. The impact of the pandemic, coupled with the need to finance the US bipartisan infrastructure plan of approximately US$4 trillion (RM16.4 trillion) have accelerated Biden’s plan.

Janet Yellen, the US Treasury Secretary was certainly in a negotiating mood during her trip to London, and the British finance minister proudly said that this was a historic moment, knowing that the right companies will be paying the right amount of taxes at the right place.

What does METR mean to

Malaysia?

Similar to certain developing and even developed nations, Malaysia offers a wide range of tax incentives for the promotion of investments in selected industry sectors.

Through tax incentives, Malaysia aims to attract foreign direct investment (FDIS) as investors from abroad, need to be incentivised to relocate or set up their operations in Malaysia.

Companies enjoying tax incentives in Malaysia may have lower effective tax rate (ETR) due to exemption on income, extra allowances on capital expenditure incurred, double deduction of expenses, special deduction of expenses, and preferential tax treatments for promoted sectors among others.

Multinational enterprises (MNE) operating in Malaysia may have lower jurisdictional ETR, say 10%, due to the Malaysian tax holiday, although the headline tax rate here is 24%. Assuming that the METR is finally agreed at 15%, it is very likely that the MNE group would be subject to top-up tax in respect of its Malaysian operations, which would represent an overall increase in taxation for the group.

This may be problematic for Malaysia as its attractiveness may be eroded by the additional tax burden on the group. Instead of the Malaysian tax authorities collecting the additional revenue, the fiscal authorities of another jurisdiction would do so.

This is likely to be the headquarters jurisdiction, assuming that the jurisdiction has implemented the Income Inclusion Rule (IIR) under Pillar 2. As a result, MNES would be subject to this additional tax burden in respect of Malaysian operations, which may be viewed as a “penalty” for operating in a tax jurisdiction that offers legitimate tax holiday.

Malaysia may consider enhancing and or introducing non-tax incentives in attracting FDIS. She may also need to relook and revise the existing Malaysian tax system, with a view to protecting her tax base.

This is important given that the Government’s revenue has been affected significantly by the Covid19 pandemic.

Given that the top-up tax in respect to Malaysian-based operations would likely be collected by the tax authorities of other jurisdictions, we may wish to consider introducing rules that would ensure that any such top-up tax to be paid in Malaysia.

This should allow the jurisdictional ETR of the relevant MNE group to be raised to the minimum ETR, through the payment of tax here, instead of in another jurisdiction.

While the additional tax burden on groups investing in Malaysia may be inevitable, introducing this measure would at least allow us to benefit from the additional revenue, which could be used to further incentivise investment here.

Malaysia has been competitive due to other X-factors such as strategic location, ease of doing business, livability. In terms of political stability, the Government is certainly doing their best. In terms of workforce, Malaysia will need to continue developing a talent pool in a timely manner to ensure a constant supply of skillful work force and invest in innovation.

I am sanguine that the various Malaysian investment and government agencies will continue to focus on these areas, including the upholding of the rule of law and protection of intellectual properties.

These efforts must continue, and be accelerated as we should not only focus on our tax incentive regime given the Pillar Two development.

The introduction of the two pillars represent a significant re-write of the international tax systems.

Although both pillars have yet to receive consensus among the Inclusive Framework members, businesses should be aware of these changes and their potential impact, including the need to conduct an impact assessment if required. Whatever lies ahead, I am certain that Malaysia will continue to support tax transparency and promote tax certainty.

With the previous anti-based erosion and profit shifting rules like the lowered threshold for corporate taxable presence and anti-treaty shopping rules coupled by latest G7’s announcement, international tax planning is coming to an end.

Corporates need to assess how these unprecedented international tax reform would affect them from the supply chain, compliance and global effective tax rate perspective.

To my beloved Malaysia, I know we will overcome the pandemic, and soon emerge as a leading choice for foreign investors, with or without tax incentives!

Given that the top-up tax in respect to Malaysian-based operations would likely be collected by the tax authorities of other jurisdictions, we may wish to consider introducing rules that would ensure that any such top-up tax to be paid in Malaysia.