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Unravelling the global minimum tax puzzle
TTCS Virtual Sharing Session on Indirect Tax

18 December 2023

THE Global Minimum Tax (GMT) is being rolled out across 135 countries, and more are expected to join in. Malaysia will be implementing GMT from Jan 1, 2025.

The intention here is to ensure that multinational enterprises pay their fair share of tax wherever they operate and generate profits.

The minimum tax that large multinationals are expected to pay should not be less than 15% on a global level. This tax only applies to multinationals with annual revenues exceeds €750 million or about RM4 billion.

Although this tax will only affect 50 or 60 Malaysian conglomerates, it has a significant impact since we have many multinational companies operating in the country whose global revenues exceed €750 million.

Many of the multinationals operating in Malaysia are enjoying tax incentives close to zero tax. The global minimum tax is going to affect their return on investments since they would not have taken this into account when they invested in Malaysia many years ago.

If the average turnover of the multinational entity is less than €10 million, and the average income of the entity is less than €1 million each year, the entity will be excluded from GMT.

The Malaysian conglomerates will have a headache. They need to carry out this calculation on a global level to see if they exceed the €750 million threshold, and they need to carry out another set of calculations at the overseas subsidiary level. The calculations are very complex and at times subjective to the interpretation of rules. Excluded from GMT rules are pension funds, government entities, non-profit organisations, investment funds, etc.

The basics

The ultimate goal here is to apply the 15% GMT on the multinational’s excess profits in the respective tax jurisdiction where the effective tax rate or the average tax rate is less than 15%. Excess profits are surplus profits after taking into account a percentage of the profits attributable to the people and the tangible assets used in the business.

Excess profits are seen by tax authorities across the world as profits prone to escape taxation or subject to minimal taxation. Examples in the past is where multinationals have used double taxation agreements, transfer pricing and special tax rulings to escape taxation around the world.

The first step is to calculate the effective tax rate of the multinational enterprise operating in any country. If it is below the 15%, the local jurisdiction will have the right to collect the differential through a top-up tax mechanism. In the event the local jurisdiction does not have the top-up tax mechanism (generally known as Qualified Domestic Minimum Top-up Tax), then the tax jurisdiction where the ultimate parent company is located will collect the differential via another mechanism called Income Inclusion Rule or in the event the jurisdiction of the parent company does not collect the differential, the other entities of the consolidated group will share the differential.

The calculation of this tax starts with the consolidated financial accounts. The revenue, income and tax costs are all obtained from the consolidated financial accounts subject to adjustments.

On revenue, the key adjustments address the difference between the financial accounts and the taxable income, adjustments to the intragroup transactions to ensure they meet the arm’s length test under the transfer pricing rules, and removing bribes/illegal payments.

Tax costs will be the tax expense in the consolidated financial accounts, but will exclude indirect taxes, payroll taxes, property taxes and taxes of a non-income nature. Taxes will include withholding taxes.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).

This article was originally published on the Sun daily.

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