Global minimum tax – What does it mean for us?

Although we don’t know when the Covid-19 pandemic will be over, international tax rules continue to evolve.

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

This involved redistributing a share of global residual profits of certain companies to market countries (Pillar 1) and a minimum effective tax rate (METR) of at least 15% in each country in which a company operates (Pillar 2).

The first pillar is necessary to ensure a fairer distribution of profits to the market jurisdictions.

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

With the advancement of technology, services could be provided anywhere in the world. The first pillar aims to redistribute $ 100 billion (RM 411 billion) in taxes, and hopefully Malaysia would benefit from this.

For the second pillar regarding METR it should be noted that 15% is not the calculated rate. Instead, it’s just the starting point. The language used is “at least”, driven by France, which fought for a higher quota. The second pillar will not materialize without the blessing of the United States.

The hope for a global consensus is renewed under the Biden government. US President Joe Biden weighed 21% but revised it to 15%. This is a very smart move by Washington to raise global intangible low-taxed income as well as US corporate tax. The impact of the pandemic, coupled with the need to fund about $ 4 trillion (RM 16.4 trillion) in the U.S. bipartisan infrastructure plan, has accelerated Biden’s plan.

Janet Yellen, the US Treasury Secretary was certainly in a negotiating mood during her trip to London, and the UK Treasury Secretary proudly said this was a historic moment, knowing that the right companies will pay the right taxes in the right place.

What does METR mean for Malaysia?

Much like certain developing and even industrialized nations, Malaysia offers a wide range of tax incentives to encourage investment in selected industrial sectors.

Malaysia aims to attract foreign direct investment (FDIs) through tax incentives, as foreign investors need to be incentivized to relocate or start doing business in Malaysia.

Companies enjoying tax incentives in Malaysia may have a lower effective tax rate (ETR) due to income exemptions, additional allowances for investments made, double expense deduction, special expense allowance and preferential tax treatment for assisted sectors among others.

Multinational Corporations (MNEs) operating in Malaysia may have a lower ETR, say 10%, due to the Malaysian tax exemption, even though the overall tax rate here is 24%.

Assuming that the METR will eventually be fixed at 15%, it is very likely that the multinational would be subject to an additional tax on its Malaysian operations, which would mean total taxation for the group.

This can be problematic for Malaysia as its attractiveness could be undermined by the Group’s additional tax burden. Instead of the Malaysian tax authorities collecting the additional revenue, the tax authorities in another jurisdiction would do so.

This is likely the headquarters’ jurisdiction, provided that the jurisdiction has implemented the Pillar 2 Income Inclusion Rule (IIR). As a result, multinational corporations would be subject to this additional tax burden on Malaysian business as a “penalty” for operating in a tax jurisdiction that offers a legitimate tax exemption.

Malaysia may consider improving and / or introducing non-tax incentives to attract FDI. She may also need to revise and revise the existing Malaysian tax system to protect her tax base.

This is important as government revenues have been severely impacted by the Covid-19 pandemic.

Given that the top-up tax on Malaysia based companies would likely be collected by tax authorities in other jurisdictions, we may want to consider introducing rules to ensure that such top-up tax is payable in Malaysia.

This should make it possible to raise the ETR of the respective country by paying taxes here to the minimum ETR of the respective MNE group, instead of in another country. While the additional tax burden may be inevitable for corporations investing in Malaysia, introducing this measure would at least allow us to take advantage of the additional income that could be used to stimulate further investment here.

Malaysia was competitive due to other X factors such as strategic location, ease of doing business and quality of life. In terms of political stability, the government is certainly doing its best. As for the workforce, Malaysia needs to develop a talent pool in a timely manner to ensure a constant supply of skilled workers and to invest in innovation.

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

These efforts need to be continued and accelerated as, as the second pillar evolves, we should not focus solely on our tax incentive system.

The introduction of the two pillars represents a significant reformulation of the international tax systems.

Although both pillars have not yet reached consensus among members of the Inclusive Framework, organizations should be aware of these changes and their potential impact, including the need to conduct an impact assessment if necessary. Whatever lies ahead, I am sure Malaysia will continue to promote tax transparency and tax security.

With the previous anti-based erosion and profit shifting rules such as the lowered threshold for taxable corporate presence and anti-treaty shopping rules in conjunction with the latest announcement by the G7, international tax planning is coming to an end.

Businesses need to assess how this unprecedented international tax reform would affect them from a supply chain, regulatory compliance and global effective tax rate perspective.

To my beloved Malaysia, I know we are emerging from the pandemic and will soon become a leading choice for overseas investors, with or without tax incentives!

Tan Hooi Beng is International Tax Leader for Deloitte Malaysia. The above views are his own.