Pillar 2 Dashboard: Malaysia

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

On December 13, 2023, the Malaysian Parliament approved the Finance Bill (No.2) 2023.

General

Whilst the 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, July 2023, the December 2023 or June 2024 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 law also apply to a Labuan constituent entity. Section 5.3 of the December MIRB Guidance also confirms that the GloBE rules apply to chargeable person under the Petroleum (Income Tax) Act 1967, if they would otherwise be in scope. 

Administrative Guidance

The Malaysian law does not include most aspects of the First Set or Second Set of OECD Administrative Guidance. 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 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.

-Meaning of “ancillary” for Non-Profit Organisations (Article 1.6, as confirmed in the December 2024 MIRB guidance);

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

However, the OECD Administrative Guidance also excludes Insurance Investment Entities from the definition of ‘Intermediate Parent Entity’. This does not appear in the Malaysian law.

The Third Set of OECD Administrative Guidance (issued in December 2023) is not reflected in the Malaysian law.

Safe Harbour and Penalty Relief Guidance

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 Safe Harbours) and the Second Set of OECD Administrative Guidance (QDMTT Safe Harbour and the Transitional UTPR 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 GIR 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.

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.

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 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 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 the 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.

Elections in the OECD Model Rules

All of the elections included in the OECD Model Rules are provided in the law, including:

– Excluded Entity Election (Section 158(4) of the law)

– Stock-Based Compensation Election (Section 165(2) of the law)

– Election to use the Realization Method (Section 165(12) of the law)

– Election to Spread Capital Gains (Section 165(16) of the law)

– Consolidation Election (Section 165(21) of the law)

– Unclaimed Accrual Election (Section 171(7) of the law)

– GloBE Loss Election (Section 172 of the law)

– Prior Year Adjustment Election (Section 173(4) of the law)

– De minimis Election (Section 182 of the law)

– Substance-Based Income Exclusion Election (Section 180(2) of the law)

– Deemed Disposal of Assets Election (Section 186(4) of the law)

– Taxable Distribution Election (Section 194(1) of the law)

– Tax Transparency Election (Section 193(1) of the law)

– Distribution Tax Regime Election (Section 191 of the law)

Elections in the Administrative Guidance

No elections included in the OECD Administrative Guidance are included in the law.

Therefore, the following are not included:

– Equity Investment Inclusion Election;

– Excess Negative Tax Carry-Forward Election;

– Debt Release Election;

– Foreign Exchange Hedge Election;

– Portfolio Shareholding Election.

Differences to Model Rules

Whilst there are no deviations from the OECD Model GloBE Rules, there are currently significant deviations from the other published OECD Guidance, particularly the Administrative Guidance.

Most aspects of the February 2023 OECD Administrative Guidance are not reflected in the law, and none of the July 2023 or December 2023 OECD Administrative Guidance are reflected in the law. Unless amended this will result in significant differences between the Malaysian implementation and other jurisdictions. Aside from the differing application of top-up tax under the IIR, the domestic minimum top-up tax does not reflect the provisions of the Administrative Guidance and as such may not qualify as a QDMTT particularly for QDMTT Safe Harbour purposes.

Qualifying Domestic Minimum Top-Up Tax

The law includes a domestic top-up tax (intended to be a QDMTT) that applies to low-taxed domestic constituent entities from January 1, 2025.

QDMTT Design Features

Under Section 159 of the law, the domestic top-up tax is calculated based on the general GloBE calculation in the law. There are very few amendments to the general GloBE calculation and a number of aspects of the OECD Administrative Guidance (which specifically alter the general GloBE calculation for QDMTT purposes) are not reflected.

The main adjustments are:

– Under Section 176(2) of the law, the profits used to determine Domestic Top-up Tax can be based on an Acceptable Financial Accounting Standard permitted by an Authorised Accounting Body or an Authorised Financial Accounting Standard adjusted to prevent any Material Competitive Distortions, rather than the financial accounting standard used in the UPEs Consolidated Financial Statements

– Section 177(2)(b) of the law amends the standard top-up tax calculation so that the determination of the QDMTT payable does not itself require the deduction of QDMTT (which would include an element of circularity).

The law does not provide for exclusions to the pushdown to CFCs or Hybrid entities (or the restriction on dividend tax).

For instance the OECD Administrative Guidance provides that tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, but this is not reflected in the law.

Filing

The relevant aspects of the submission of a GloBE Information Return (GIR) are included, as provided in the OECD Guidance.

The proposed approach is that every Constituent Entity located in Malaysia will have an obligation to file a GIR in Malaysia. However, this obligation can be discharged if the GIR is filed by:

– A Designated Local Entity,

– The Ultimate Parent Entity.

Where the GIR is being filed by either the Ultimate Parent Entity or the Designated Filing Entity, the Constituent Entity, must file a notification with the Revenue.

The notification must contain:

– Details of the entity that is filing the GIR, and

– The jurisdiction in which such an entity is located.

Where the GIR is filed by the Designated Local Entity it needs to outline the Constituent Entities that it is filing on behalf of.

Both the GIR and associated notifications must be filed no later than 15 months after the end of the fiscal year.

As well as the GIR, the law requires the submission of a top-up tax return by the GIR filing deadline.

Payment

Article 220 of the law also requires payment of top-up tax by the filing deadline.

Penalties

Under Sections 224 and 225 of the law, failure to file the GIR or top-up tax return can result in a penalty of not less than twenty thousand ringgit and not more than one hundred thousand ringgit.

Incorrect information on a GIR or top-up tax return can also result in the same penalty, however, incorrect information on a top-up tax return also results in a special penalty of double the amount of tax which has been undercharged.

None issued.