What is Pillar Two?
Pillar Two, also known as the "Global Anti-Base Erosion" (GloBE) Rules, is a component of the ongoing international tax reform efforts led by the Organisation for Economic Cooperation and Development (OECD) and the G20 countries.
It is part of the Base Erosion and Profit Shifting (BEPS) project aimed at addressing tax challenges arising from the digitalisation of the economy and multinational profit shifting.
Pillar Two focuses on establishing a global minimum tax to ensure that multinational enterprises (MNEs) pay a minimum level of tax regardless of where they operate and where they allocate their profits.
The primary goal of Pillar Two is to tackle the issue of tax avoidance and profit shifting by multinational companies and create a more level playing field for businesses worldwide.
The key elements of Pillar Two include:
Global Minimum Tax Rate: Pillar Two proposes introducing a global minimum tax rate that MNEs must pay on their income. This minimum rate is intended to prevent MNEs from shifting profits to low-tax jurisdictions and ensure a fair distribution of tax obligations.
Income Inclusion Rule (IIR): The income inclusion rule requires countries to tax their resident companies on profits not subject to the minimum tax rate in other jurisdictions. This rule ensures income is not completely shielded from taxation by shifting it to low-tax jurisdictions.
Undertaxed Payments Rule (UTPR): The undertaxed payments rule allows countries to deny deductions or impose withholding taxes on certain payments made to related entities located in jurisdictions with a tax rate below the agreed-upon minimum.
Qualified Domestic Minimum Top-up Tax (QDMTT): Jurisdiction may introduce a QDMTT, which would use the same tax base as the GloBE Rules but take priority against IIR and UTPR in which QDMTT will be sufficient to satisfy the requirements of Pillar Two.
The implementation of Pillar Two requires international cooperation and consensus among participating countries.
It aims to establish a more coordinated and equitable international tax framework that reduces tax avoidance and ensures a fair distribution of tax responsibilities among countries and multinational corporations.
It is important to note that the specific details and implementation of Pillar Two are still being negotiated and developed by the participating countries and international organisations involved in the global tax reform efforts.
Malaysia expects to implement the two-pillar taxation approach in 2024
The two-pillar approach refers to the Base Erosion and Profit Shifting (BEPS) 2.0 initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD) and G20.
Malaysia has agreed to implement the “two-pillar approach” in taxation to create a competitive environment for both foreign and domestic direct investment.
The approach, which also prevents cross-border tax evasion, is being studied and is estimated to begin in 2024.
The GloBE Rules serve as the primary reference source in formulating legislation to ensure that this legislation is considered "fit for purpose" during the Peer Review session.
The Public Consultation Paper (PCP) on implementing the GloBE Rules under Pillar Two in Malaysia was published by MOF in August 2022.
The stated objectives of the PCP are to:
Provide policy insights on the GloBE Rules under Pillar Two, and
Gather views and comments from stakeholders on the adoption of the GloBE Rules, including any critical implementation issues which may arise in Malaysia.
Therefore, the industry should take this opportunity to raise questions or seek clarification for more information.
By releasing the PCP, Malaysia emphasises its dedication to upholding internationally recognised tax standards.
Malaysia further believes that implementing the GloBE Rules will effectively address the outstanding BEPS concerns within the country, expand its tax base, safeguard its authority to tax profits generated locally, and concurrently maintain its appeal to foreign investors.
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