2024 Updates on Global Minimum Tax

Knowledge • 2024 Updates on Global Minimum Tax

2024 Updates on Global Minimum Tax (GMT).

As one of the most discussed topics, the Global Minimum Tax (“GMT”) is one of the largest tax reformations as part of the initiative under Pillar 2 of the Base Erosion Profit-Shifting (“BEPS”) 2.0 project. It subjects multinational companies, with an annual revenue of more than EUR 750 million in minimum 2 out of the past 4 fiscal years, a minimum tax rate of 15% regardless of their location.

The Pillar 2 Model Rules, also known as Global Anti-Base Erosion (“GloBE”) Rules, were released by the OECD on 20 December 2021 to end the competition between countries to offer the lowest possible corporation tax rates to attract foreign investments by subjecting multinational groups around the world to a global minimum tax of 15%.

Implementation of GMT in the region

Whilst several countries such as Australia, South Korea, Japan, and Vietnam have commenced the implementation of GMT as of 1 January 2024, other countries such as Malaysia, Singapore, Thailand, and Hong Kong are expected to implement the rules from 1 January 2025 onwards.

Jurisdictional GloBE ETR

ETR calculation is performed at the jurisdictional level for each multinational subgroup to determine whether top-up taxes are required.

Top-up Tax Calculation

In determining the jurisdictional GloBE ETR, if below 15%, the top-up tax is required to be computed. Figure 1 below illustrates the top-up tax calculation.

Figure 1: Top-up tax percentage calculation

GloBE top-up taxes are levied on excess profit, i.e. profit which are in excess of an exclusion for economic substance.

In other words, the Excess Profit is computed by the exclusion of Substance-Based Income Exclusion (“SBIE”) from the GloBE Income. The SBIE excludes a share of GloBE Income from the tax base under the GloBE Rules, based on the amount of tangible assets and payroll reported in a jurisdiction.

During the year-one SBIE transition period, the SBIE equals to sum of 8% of the value of tangible assets and 10% of the value of payroll. Subsequently, the SBIE reduces to a sum of 5% of the value of the tangible assets and 5% of the value of payroll in year-ten SBIE.

Figure 2 below illustrates the detailed top-up tax calculation on a jurisdictional level.

Figure 2: Top-up tax calculation

Note: GMT ETR is calculated based on Covered Taxes divided by GloBE Income.

Collection of Top-up Tax

The jurisdiction has the right to collect top-up taxes determined through the implementation of GMT. The top-up taxes can be collected by implementing a Qualified Domestic Minimum Top-up Tax (“QDMTT”).

Remaining top-up taxes post implementation of QDMTT can be collected by the Ultimate Parent Entity’s jurisdiction under the Income Inclusion Rule (“IIR”). The IIR can also be collected under the Intermediate Parent Entity. Where QDMTT is not applied by a jurisdiction, the IIR will generally be applicable.

If there are still top-up remaining post QDMTT and IIR, the Undertaxed Profits Rule (“UTPR”) can be applied as a backstop to ensure all low-taxed income is taken into account under the GMT. Under the UTPR, each jurisdiction can collect top-up tax in proportion to the amount of substance of the MNE group in the jurisdiction.

Figure 3: Top-up Tax Rules under GMT

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It will be critical to engage specialist consultants from the beginning of the process to manage the relationship with the ATO and to assist with the technical documentation.

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