Malaysia will adopt the OECD Global Anti-Base Erosion (GloBE) Model Rules under Pillar Two and implement a Domestic Top-Up Tax (DTT) as from 1 January 2025.
The GloBE Rules impose top-up tax on a parent entity in respect of the low-taxed income of a constituent entity (CE) up to the minimum rate of 15%. The DTT is a minimum tax that is included in the domestic law of a jurisdiction and takes priority over the GloBE Rules; it reduces the amount of top-up tax that may otherwise be applicable under the GloBE Rules and payable in another jurisdiction.
The GloBE Rules and DTT have been incorporated into Malaysian law by inserting a new Part XI - Implementation of Domestic Top-Up Tax and Multinational Top-Up Tax with 19 chapters into the Income Tax Act 1967 and by referring to this new Part in the Petroleum (Income Tax) Act 1967 and Labuan Business Activity Tax Act 1990. The legislative changes were made via the Finance (No. 2) Act 2023, which was gazetted on 29 December 2023.
The following entities are excluded from the above definition:
There is a de minimis exclusion, under which the MTT for CEs in a jurisdiction will be deemed to be zero for a financial year if for that financial year
The formula for calculating the MTT is as follows:
MTT = Top-Up Tax % x Excess Profit + Additional Current Top-Up Tax - DTT
Where:
The MTT for a jurisdiction (safe harbour jurisdiction) will be deemed to be zero for a financial year when the CEs located in this jurisdiction are eligible for a GloBE safe harbour pursuant to the conditions provided under the GloBE Implementation Framework and applicable for that financial year. However, it will not apply in circumstances where Malaysia could be allocated MTT if the ETR for the safe harbour jurisdiction was below the minimum 15% rate.
Information return
Top-up tax return
Recordkeeping
Every CE that is required to furnish a return for a reporting financial year will have an obligation to keep and retain sufficient documents for seven years from the end of that reporting financial year.
Offences and penalties
In line with the OECD GloBE Rules, the DTT and MTT do not apply to wholly domestic groups.
The OECD GloBE Rules consist of two mechanisms:
It should be noted that the transitional relief provided under the OECD GloBE Rules where a GloBE information return must be filed no later than 18 months (instead of 15 months) after the last day of the reporting fiscal year for the first fiscal year that the MNE group comes within the scope of the GloBE Rules was not adopted by Malaysia.
Tan Chin Teck
BDO in Malaysia
The GloBE Rules impose top-up tax on a parent entity in respect of the low-taxed income of a constituent entity (CE) up to the minimum rate of 15%. The DTT is a minimum tax that is included in the domestic law of a jurisdiction and takes priority over the GloBE Rules; it reduces the amount of top-up tax that may otherwise be applicable under the GloBE Rules and payable in another jurisdiction.
The GloBE Rules and DTT have been incorporated into Malaysian law by inserting a new Part XI - Implementation of Domestic Top-Up Tax and Multinational Top-Up Tax with 19 chapters into the Income Tax Act 1967 and by referring to this new Part in the Petroleum (Income Tax) Act 1967 and Labuan Business Activity Tax Act 1990. The legislative changes were made via the Finance (No. 2) Act 2023, which was gazetted on 29 December 2023.
Scope of application
Part XI will apply to Malaysian CEs, including Labuan entities, which are members of a multinational enterprise (MNE) group with annual revenue of EUR 750 million or more in at least two of the four immediately preceding financial years. An MNE group means any group that includes at least one entity or permanent establishment that is not located in the jurisdiction of the ultimate parent entity (UPE).The following entities are excluded from the above definition:
- Governmental entities;
- International organisations;
- Non-profit organisations;
- Pension funds;
- Investment funds that are UPEs;
- Real estate investment vehicles that are UPEs; and
- Entities that are at least 85% or 95% owned by one or more excluded entities other than a pension services entity (subject to conditions).
Imposition and general characteristics of the tax
The DTT will be charged on a low-taxed CE located in Malaysia if the jurisdictional effective tax rate (ETR) in Malaysia is less than 15%. The Multinational Top-Up Tax (MTT) will be charged on the UPE located in Malaysia for its low-taxed CEs located in other jurisdictions with an ETR less than 15%.There is a de minimis exclusion, under which the MTT for CEs in a jurisdiction will be deemed to be zero for a financial year if for that financial year
- the average* GloBE revenue of such jurisdiction is less than EUR 10 million; or
- the average* GloBE income or loss of such jurisdiction is less than EUR 1 million.
The formula for calculating the MTT is as follows:
MTT = Top-Up Tax % x Excess Profit + Additional Current Top-Up Tax - DTT
Where:
| Top-Up Tax % | = Minimum rate (15%) – ETR |
| Excess Profit | = Net GloBE Income – Substance-Based Income Exclusion* * Exclusion of a fixed return on assets and payroll expenses in each jurisdiction |
| Additional Current Top-Up Tax | = Any incremental top-up tax resulting from the recalculation of the ETR and top-up tax for the prior financial year |
The MTT for a jurisdiction (safe harbour jurisdiction) will be deemed to be zero for a financial year when the CEs located in this jurisdiction are eligible for a GloBE safe harbour pursuant to the conditions provided under the GloBE Implementation Framework and applicable for that financial year. However, it will not apply in circumstances where Malaysia could be allocated MTT if the ETR for the safe harbour jurisdiction was below the minimum 15% rate.
Compliance
Covered taxpayers will be required to file an information return and a Top-Up Tax return and there will be recordkeeping requirements, with penalties imposed for noncompliance.Information return
- A CE will be required to submit an information return no later than 15 months from the last day of the reporting financial year.
- The information return may be filed by the CE itself, a designated local entity, the UPE or a designated filing entity. The election must be made by a notice in writing and furnished not later than 15 months from the last day of the reporting financial year by the CE or the designated local entity.
Top-up tax return
- Every CE of an MNE group will be required to submit a top-up tax return no later than 15 months from the last day of the reporting financial year.
- An amended top-up tax return will be filed after the due date for submitting the return but not later than six months from that date.
- The tax or additional tax payable will be increased by a sum equal to 10% of the amount of such tax or additional tax.
- DTT or MTT will be due and payable on the last day of the 15th month from the close of the reporting financial year.
Recordkeeping
Every CE that is required to furnish a return for a reporting financial year will have an obligation to keep and retain sufficient documents for seven years from the end of that reporting financial year.
Offences and penalties
BDO insight
The global minimum tax was initially set to be implemented in Malaysia in 2024 but has been postponed to 2025, providing MNEs that fall within scope more time to prepare for compliance. However, Malaysian MNEs with operations in countries implementing Pillar Two in 2024 (e.g., Japan, South Korea and the UK) must review and assess the impact immediately.In line with the OECD GloBE Rules, the DTT and MTT do not apply to wholly domestic groups.
The OECD GloBE Rules consist of two mechanisms:
- Income Inclusion Rule (IIR) that imposes top-up tax on a parent entity in respect of the low-taxed income of a CE up to the minimum rate; and
- Undertaxed Payment Rule (UTPR) that disallows deductions or requires an equivalent adjustment to the extent the low-taxed income of a CE is not subject to tax under an IIR.
It should be noted that the transitional relief provided under the OECD GloBE Rules where a GloBE information return must be filed no later than 18 months (instead of 15 months) after the last day of the reporting fiscal year for the first fiscal year that the MNE group comes within the scope of the GloBE Rules was not adopted by Malaysia.
Tan Chin Teck
BDO in Malaysia