On 3 June 2022, the Ministry of Finance released a Pre-Budget Statement (“PBS”) for the 2023 Budget which is scheduled to be tabled on 28 October 2022. The PBS provides a preliminary overview of, amongst others, Malaysia’s current economic and fiscal position, tax revenue and expenditure strategy, and macroeconomic outlook for 2023.
Of particular note is the implementation of the Two-Pillar approach advocated by the Organisation for Economic Co-operation and Development to address the tax challenges arising from the digital economy.
Pillar One contains measures that would impose taxation where a multinational enterprise (“MNE”) with a turnover above Euro 20 billion (approximately RM92.3 billion) and profitability above 10%, derives significant revenue from market jurisdictions but otherwise does not have sufficient nexus with such jurisdictions to be taxable.
Conversely, Pillar Two is applicable to MNEs with an annual global turnover of at least Euro 750 million (approximately RM3.5 billion) and aims to ensure that in-scope MNEs are subject to an effective tax rate (“ETR”) of at least 15% in each of the jurisdictions where they operate. Broadly this will be achieved by imposing a top-up tax on profits arising in a jurisdiction whenever the ETR, determined on a jurisdictional basis, is below 15%. Given the revenue threshold, Pillar Two is likely to be of more relevant to Malaysian businesses than Pillar One.
In view of the above, the Ministry of Finance is considering the introduction of a Qualified Domestic Minimum Top-up Tax (“QDMTT”) under the Global Anti-Base Erosion (“GloBE”) Rules of Pillar Two. Simply put, the QDMTT is a tax that is applied to Excess Profits of domestic in-scope entities (i.e. Constituent Entities) and operates to increase the domestic tax liability with respect to those profits to the minimum ETR of 15%. The QDMTT will effectively change the order in which jurisdictions are entitled to charge top-up taxes where the ETR of a Constituent Entity falls below 15%; a jurisdiction with a QDMTT becomes the first in line to receive any top-up tax revenue from entities located in its jurisdiction.
At this juncture, it remains to be seen how the QDMTT will be implemented in Malaysia. We note that similar proposals are being considered in Singapore, Hong Kong and Switzerland.
On the basis that the GloBE Rules under Pillar Two are expected to be implemented in early 2023, affected MNE groups should consider, amongst others, the following:
- Given the technical nature of the GloBE Rules and the abundance of new terms, MNE groups must ensure that they have a detailed working knowledge of the GloBE Rules;
- The GloBE Rules require the extraction of information to test whether the Euro 750 million threshold is exceeded. The ability to extract this information needs to be addressed. Monitoring will also be required in order to determine when the threshold is exceeded;
- A considerable amount of financial information is required to compute the top-up tax. MNE groups need to confirm that their accounting systems will provide ready access to the requisite information. This is likely to be a particular challenge for groups that have legacy accounting systems following acquisitions; and
- MNE groups should consider running simulations to determine the impact of any top-up tax.
The PBS may be accessed from the link above.
