Hungary declines to endorse plan for global minimum tax
The drive to develop a global minimum tax regime came to the fore on 1 July 2021, when the finance ministers of the G-7 group endorsed the work being led by the OECD to reform the international system of corporate taxation. The goals of the OECD plan are to ensure that multinational enterprises (MNEs) pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence there, and to introduce a global minimum tax rate of at least 15%.
The OECD plan gained some momentum when the finance ministers of the G-20 nations announced on 10 July their endorsement of the proposals presented in the 1 July 2021 “Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy” issued by the OECD Inclusive Framework.
The planned tax reform
The OECD began work on the new international tax framework in 2016, with the establishment of the OECD/G20 Inclusive Framework on BEPS, which now includes 139 members. Discussions within the Inclusive Framework on how to address the tax challenges of the digitalisation of the economy culminated in the release of “blueprints” for a two-pillar solution in October 2020.
Under the first pillar of the revised plan, the largest and most profitable companies would pay tax where their users and customers are located, not just where they have their headquarters.
The second pillar of the plan deals with the introduction of a global minimum corporate income tax rate. The G-7 finance ministers favor setting a minimum effective corporate tax rate of at least 15%. On 1 July, the OECD announced that 130 countries, representing more than 90% of global GDP, endorsed the OECD/Inclusive Framework proposal and a minimum tax rate of at least 15%; however, nine countries, including Hungary, declined to sign on. Two additional countries subsequently signed on to the statement, bringing the total to 132 out of 139 Inclusive Framework countries.
The OECD aims to finalize the technical details of the proposal by October 2021 so that the new rules can be implemented in 2023.
The Hungarian Ministry of Finance considers that the economic impact of the proposal may depend to a significant extent on the technical details, and has therefore actively represented Hungary’s position throughout the negotiations. Hungary is trying to promote an agreement that limits tax competition for real investments as little as possible, is flexible enough to deal with differences between the tax systems of individual countries and does not hinder the spread of best tax practices.
On the OECD's global minimum tax proposal, Hungary is of the opinion that international regulation should focus primarily on curbing artificial profit reallocation techniques, while in the case of profits related to real activities, the tax sovereignty of states should be respected.
The Ministry of Finance has consulted with the principal Hungarian economic operators, including a professional forum of tax advisors. As a result, in future OECD negotiations relating to the global minimum tax, Hungary will primarily seek to advance the following principles:
- The minimum tax rate should exceed Hungary’s current corporate tax rate of 9% as little as possible and the range of available tax credits should be as broad as possible.
- Profits related to real activity should be exempt from the minimum tax rules to the extent possible. Under the current proposal, the minimum tax rules would exclude an amount of income that is at least 5% of the carrying value of tangible assets and payroll (or 7.5% in a five-year transition period. However, the basis for this exclusion is rather narrow, as the amount would be determined in terms of depreciation and labor costs, while their respective ratios are currently unknown.
- Timing differences between tax bases should be managed as flexibly as possible. The current draft proposes that when the tax on profits falls below the agreed minimum effective tax rate, the “income inclusion rule” would result in additional “top up” tax to be paid by the ultimate parent entity of the group in its home jurisdiction. The “undertaxed payment rule” would apply as a secondary rule when the income inclusion rule has not been applied. Initially, companies “undertaxed” due to timing discrepancies would have to pay the extra tax liability. Hungary would be more supportive of an approach based on deferred tax assets and liabilities.
- The proposed tax reform plan should provide at least a temporary exemption for previously granted tax benefits, in particular the development tax benefit.
- In Hungary's view, the new regulation should also apply to subsidiaries operating in the country of the parent company. Under the current proposal, this could only be realized through the application of the secondary mechanism.
- The minimum tax rules should be applicable within the EU without further restrictions. Hungary considers that the proposed measures, if implemented without any modifications, would be considered selective according to the case law of the EU Court of Justice. Thus, the rules could either be introduced only for purely artificial constructions, which would be contrary to the expected OECD agreement, or require additional restrictions on subsidiaries operating in the country of the parent company and presumably at least partial harmonization of tax bases.
- It should also be possible to collect the top-up tax in the countries of the subsidiaries, especially because the minimum tax base is based on the parent company's reporting standards. The proposal does not currently exclude this possibility.