Rome hosted the annual G20 Summit on 30 and 31 October 2021 for Heads of State, Ministers of Economy and Finance. At the conclusion of the meeting, the G20 Leaders adopted the Rome Declaration. This Declaration outlines G20 Leaders agreement to introduce the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”).
According to the Leaders’ Declaration, this is the final political agreement as set out in the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.
In response, Secretary-General Mathias Cormann from the OECD welcomed the declaration recognising the work that had been undertaken through the Inclusive Framework to develop new international taxation rules.
Implementation by 2023
It was noteworthy to see implementation language included in the Leaders’ Declaration as well as reference to an implementation deadline. The Declaration says that countries should work with a view to ensure that the new rules will come into effect at global level in 2023.
Secretary-General Mathias Cormann said: “As we move into the implementation phase of the agreement, the OECD stands ready to facilitate the work needed to ensure the timely and effective implementation of the two-pillar solution.”
This further reinforces the resolve to implement these new rules within twelve months which is widely acknowledged as ambitious. That said, the Undertaxed Payment Rule is targeted to be effective in countries from one year later, in 2024.
All eyes now turn to the United States (“U.S.”) and President Joe Biden’s domestic tax reform agenda and specifically to what extent and when the U.S. will adopt provisions that mirror the BEPS 2.0 rules. In particular the speed with which the U.S. adopts rules that mirror BEPS 2.0 will influence the roll back, or proliferation, of Digital Services Taxes. This outcome may even influence the timing and adoption of BEPS rules by other participants of the Inclusive Framework.
Malaysia’s Reaction to the G20 Leaders’ Declaration
The Government of Malaysia (“GoM”) is studying the impact of BEPS 2.0 and the changes required in the existing tax legislation and Double Taxation Agreements. We expect the implementation and technical details will be released by OECD in the next couple of weeks. In furtherance of the OECD releases, we expect the GoM to make corresponding announcements in due course.
As can be seen from the proposed removal of income tax exemption on foreign source income in the recent 2022 Budget announcement, the initiative taken is not merely a reaction to the EU’s grey list but also to prepare Malaysia to implement BEPS Pillar 2.
A copy of G20 Leaders’ Declaration and our earlier publication can be accessed via the above links.
Should you have any questions or require further clarification, please do not hesitate to email or contact any of our Executive Directors, Directors, Associate Directors or Managers whom you are accustomed to dealing with or who are responsible for the tax affairs of your organization.
Tai Lai Kok