Malaysia Issues Guidelines for the Implementation of the Global Minimum Tax

General

On December 29, 2023, the Finance Act (No. 2) 2023 (the law) was published in the Official Gazette. This implements the Pillar Two GloBE rules in Malaysia from January 1, 2025. 

However, certain aspects of the law were unclear, particularly as regards to the OECD Safe Harbours. 

Section 134A of the Income Tax Act 1967 (ITA) provides that the Director General is
empowered to issue Guidelines to provide guidance and clarity over the application of any area of tax law. 

In December 2024, the Malaysian Inland Revenue Board (MIRB) issued guidance on the interpretation and administration of the Pillar Two global minimum tax law from January 1, 2025.

Whilst most of the guidance is a general guide on how to determine if a group is in scope of the global minimum tax law, it does bring some welcome clarifications as to:

-Certain aspects of the OECD Administrative Guidance

-The OECD Safe Harbours

OECD Administrative Guidance

The Malaysian law does not include most aspects of the First, Second, Third or Fourth Set of OECD Administrative Guidance. For instance, the following are not included:

– Currency Conversion Rules (Article 1.1)

– Clarifying the definition of ‘Excluded Entity’ (Article 1.5)

– Forex hedge election (Article 2.2)

– Excluded Dividends – Asymmetric treatment of dividends and distributions (Article 2.3)

– Debt release election (Article 2.4)

– Accrued Pension Expenses (Article 2.5)

– Excess negative tax carry-forward guidance (Article 2.7)

– Substitute Loss carry forwards (Article 2.8)

– Equity Gain or loss inclusion election (Article 2.9)

– Allocation of taxes arising under a Blended CFC Tax Regimes (Article 2.10)

– The extension of the taxable distribution method election to insurance investment entities (Article 3.1)

– Exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Article 3.2)

– Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)

– Portfolio shareholding election (Article 3.5)

– Application of the Tax transparency election to Mutual insurance companies (Article 3.6).

– Currency Conversion Rules (Article 1 of the Second Set of OECD Administrative Guidance )

– Tax Credits Guidance (MTTCs) (Article 2 Second Set of OECD Administrative Guidance)

– SBIE Rules:

– Foreign rules (Article 3 Second Set of OECD Administrative Guidance)

– Stock-based compensation election

– Leases (Article 3 Second Set of OECD Administrative Guidance)

The only aspects included are:

– The extension of Additional Capital to include Restricted Tier One Capital under Article 3.3 of the February 2023 OECD Administrative Guidance.

– The exclusion of Insurance Investment Entities from the definition of Partially-Owned Parent Entity under Article 3.2 of the February 2023 OECD Administrative Guidance.

Additions in the December MIRB Guidance

The December MIRB Guidance also includes:

-Sovereign wealth funds and the definition of Ultimate Parent Entity (Article 1.4, as confirmed in Article 5.4 of the December 2024 MIRB guidance);

-Meaning of “ancillary” for Non-Profit Organisations (Article 1.6 of the First Set of OECD Administrative Guidance, as confirmed in Section 5.8 the December 2024 MIRB guidance);

Safe Harbours

The law does not provide for detailed Safe Harbour Guidance. Section 195 of the law states that ‘GloBE Safe Harbours’ will apply domestically (to deem top-up tax to be zero) when they meet the conditions under the GloBE Implementation Framework for that Financial Year.

The “GloBE Implementation Framework” is further defined in the law as the  ‘…procedures to be developed by the Inclusive Framework on Base Erosion and Profit Shifting in order to develop administrative rules, guidance, and procedures that will facilitate the coordinated implementation of… the Safe Harbours…’.

Therefore, this should include the various safe harbours as provided in the OECD Safe Harbours and Penalty Relief Guidance (Transitional CbCR Safe Harbour/Simplified Calculation Safe Harbours) and the Second Set of OECD Administrative Guidance (QDMTT Safe Harbour).

The December 2024 MIRB guidance provides further information on the application of the QDMTT Safe Harbour which reflects the Second Set of OECD Administrative Guidance (including for the application of the Switch-off Rule).

It also provides general commentary on the implementation of the Transitional CbCR Safe Harbour with reference to the OECD Guidance.

Section 9.5 confirms that MNE Groups that are in scope of the GloBE Rules but not required to file CbC Reports are still eligible for the Transitional CbCR Safe Harbour if they complete section 2.2.1.3(a) of the GloBE Information Return using the data from Qualified Financial Statements that would have been reported as Total Revenue and Profit (Loss) before Income Tax in a Qualified CbC Report if the MNE Group were required to file a CbC Report. This reflects Article 2.3.4 of the December 2023 OECD Administrative Guidance.

Section 9.6 of the December 2024 MIRB Guidance confirms that Transitional CbCR Safe Harbour does not permit adjustments to the amounts reported in financial accounts or separate financial statements in order for them to be considered Qualified Financial Statements. This reflects Article 2.3.3 of the December 2023 OECD Administrative Guidance.

However, where the MNE Group allocated and incorporated purchase price accounting (PPA) adjustments into the financial accounts of an acquired Constituent Entity that are used in the preparation of the Consolidated Financial Statements or the separate financial statements of the Constituent Entity, those financial accounts or separate financial statements will not be considered Qualified Financial Statements, unless a consistent reporting condition is met and the goodwill impairment adjustment is made (as provided in Section 1 of the December 2023 OECD Administrative Guidance).

Section 9.25 of the December 2024 MIRB Guidance also provides that adjustments must be made to a Tested Jurisdiction with respect to Hybrid Arbitrage Arrangements in order to determine whether the Tested Jurisdiction qualifies for the Transitional CbCR Safe Harbour (as provided in Section 2.6 of the December 2023 OECD Administrative Guidance).

Section 10 of the December 2024 MIRB Guidance also includes provisions for Non-Material Constituent Entities (NMCEs) as provided in Section 6 of the December 2023 OECD Administrative Guidance.

A Filing Constituent Entity may make an annual election to apply the simplified income and tax calculations for its NMCEs, which applies on an Entity-by-Entity basis, not a jurisdictional basis.