A Review of Malaysia’s Draft Pillar Two Law

Overview

On December 13, 2023, the Malaysian Parliament approved the Finance Bill (No.2) 2023.This inserts a new Part XI into the Income Tax Act, 1967 to implement the GloBE rules. The law needs to be approved by the King to be enacted.

The draft law includes an income inclusion rule (IIR) (referred to as the ‘Multinational Top-Up Tax’) and a domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax) from January 1, 2025. The Under-Taxed Profits Rule (UTPR) is not included in the draft law.

As provided in the OECD Model Rules, the IIR/Multinational top-up tax does not apply to wholly domestic groups.

Whilst the draft law is to implement the OECD Model GloBE Rules into domestic law, it does not currently reflect most aspects of the OECD Administrative Guidance (either the February 2023 or July 2023 guidance issued).

The GloBE Safe Harbours as provided in the OECD Safe Harbours and Penalty Relief Guidance (Transitional CbCR Safe Harbour/Simplified Safe Harbours) and the Second Set of OECD Administrative Guidance (QDMTT Safe Harbour and the Transitional UTPR Safe Harbour) are to be transposed into domestic law by way of a static reference.

Section 3 of the Labuan Business Activity Tax Act, 1990,  is also amended to provide that the GloBE rules in the draft law also apply to a Labuan constituent entity.