This update provides an overview of the upcoming Global Minimum Tax (GMT) framework, aimed at helping Malaysian MNCs, SMEs, and tax professionals understand the key changes expected in 2025 and how it may impact their tax strategies and operational planning.
To recap, in Budget 2024, Malaysia’s Prime Minister and Finance Minister, YAB Dato’ Seri Anwar Bin Ibrahim, announced the introduction of the Global Minimum Tax (GMT). Effective from financial years starting January 1, 2025, this tax regime sets a minimum 15% rate for multinational enterprises (MNEs) to ensure they pay a fair share of taxes, regardless of where they operate.
The Finance (No. 2) Bill 2023 incorporates key elements from the OECD’s BEPS Pillar 2 Model Rules to enable this new framework. For context, Pillar Two sets the GMT at an effective rate of 15% for MNEs with global revenues exceeding €705 million (RM3.3 billion).
Key Highlights of GMT for 2025
- National Application of GMT: Companies will be required to pay a top-up tax when their effective tax rate in a specific jurisdiction falls below the 15% level. The aim is to discourage profit shifting and tax avoidance strategies. This implementation will apply to MNCs with an annual consolidated revenue of €705 million or more in at least 2 out of the 4 immediately preceding financial years.
- Alignment with OECD Model Rules and QDMTT Regime: Malaysia’s approach aligns with OECD’s Model Rules, introducing the Qualified Domestic Minimum Top-Up Tax (QDMTT) regime. This comprises three key components, being the (i) the Multinational Top-Up Tax (MTT), (ii) Domestic Top-Up Tax (DTT), and (iii) Minimum Tax. The QDMTT allows Malaysia to impose top-up taxes domestically, reducing the risk of other countries claiming top-up taxes on Malaysian entities.
- Concept of DTT and MTT: GMT ensures that MNEs meet a 15% ETR in every jurisdiction. Malaysia’s DTT applies to low-taxed Malaysian entities, while the MTT is applied on Malaysian parent entities with low-taxed foreign subsidiaries.
- Calculation of Effective Tax Rate (ETR): Companies’ ETRs under GMT are calculated by dividing adjusted taxes (Adjusted Covered Tax) by profits within each jurisdiction, as per OECD’s GloBE rules. In short, if a jurisdiction’s ETR falls short of 15%, a top-up tax on excess profits will apply
- De Minimis Exclusion: Under the De Minimis Exclusion, companies may choose to adopt the GloBE Safe Harbour, which lowers the MTT to zero for a particular jurisdiction if the average GloBE revenue is less than €10 million and the average GloBE income or loss is less than €1 million over the current and two preceding financial years. As such, subsidiaries meeting these criteria may not be subject to GMT.
What Businesses Can Expect in 2025:
While GMT primarily targets large MNEs, smaller enterprises may still see some indirect impacts, and they should be prepared for the following adjustments:
- Increased Tax Liabilities: MNCs operating in low-tax jurisdictions may see heightened tax obligations, as GMT requires making up any shortfall to the 15% threshold. This change could reduce after-tax profits and may prompt MNEs to review tax strategies.
- Regular Audits and Assessments: Companies will likely face new audit requirements and tax position assessments to ensure their ETRs meet GMT standards. This will involve additional operational resources and the need for tax expertise, as non-compliance may attract penalties.
- Impact on Supply Chains: SMEs and start-ups within MNC supply chains might face cost adjustments as larger corporations offset higher tax burdens. MNCs may renegotiate pricing or contract terms, affecting smaller businesses’ profit margins.
Future Outlook on GMT Implementation
As GMT takes effect, companies can expect further guidance and supportive measures from the Malaysian government to facilitate a smooth transition to this regime. Businesses should stay informed on compliance requirements and any evolving elements within the GMT framework to be well-prepared for 2025 and beyond.
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This article was written by George Teng (Associate) from Donovan & Ho’s corporate and commercial practice group.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
