The purpose of the global minimum tax is to limit harmful tax competition
The new Hungarian law is directly based on the EU legislation, but the basic elements of both are the OECD model rules (BEPS Project - Pillar Two),their commentaries and the related administrative guidelines.
The introduction of a single minimum rate of income tax (15%) and the related global set of rules (commonly known as GloBE - Global Anti-Base Erosion Model Rules) is intended to reduce harmful tax competition at international level.
Global minimum tax: entities concerned
Even though the rules of the new tax were developed by the OECD, they have not been implemented in all member states, including large economies such as the United States and China. In enacting countries, the new tax will apply to multinational groups and to members of large domestic groups of companies operating in EU member states, provided that, as a general rule, the group's consolidated income is equal to or exceeds €750 million in at least two of the four tax years preceding the tax year in question.
What does the introduction of GloBE mean in Hungary?
GloBE is a new tax regime with new tax base assessment methods, tax calculations and exemption options. Familiarisation with the international and domestic legislation describing the new tax regime, the introduction of the new tax regime at international and domestic level and the specific details of the Hungarian legislation are major challenges for the entities concerned.
Is the global minimum tax the new corporate challenge?
In addition to introducing new concepts in Hungarian taxation, the global minimum tax also requires companies to apply a variety of tax base assessment and tax calculation rules.
The first of these new concepts is the Effective Tax Rate (ETR). The effective tax rate for the groups of companies concerned must be determined for each tax year and for each country. On the basis of the ETR determined, it can be determined whether the group operating in a given state qualifies as a low-taxed group and whether it should pay top-up tax. The ETR can be determined based on the so-called covered taxes of the group members resident in the given country and the recognised net profit of the companies.
Key issue – taxes covered
The GloBE stipulates as a main rule that taxes on business income or profits are so called covered taxes, and fortunately the Hungarian legislation recognises the corporate income tax, local business tax, innovation contribution and the ‘Robin Hood’ tax (income tax on energy suppliers) as such.
Briefly on the QDMTT – how much?
The countries that have joined the global minimum tax regime have agreed that if the effective tax burden of group members operating in their territory is lower than 15 %, the difference will be collected as a top-up tax through various collection mechanisms.
As typically subsidiaries or intermediate parent companies of groups subject to the global minimum tax are located in Hungary, it is expected that the most commonly used collection rule for Hungarian group members will be the Qualified Domestic Minimum Top-Up Tax (QDMTT),which will be introduced as part of the GloBE, and that domestic group members will be responsible for calculating and meeting their tax obligations.
The net profits on which the top-up tax is based will be determined by the group members in accordance with the local accounting standards, which means that the Hungarian Accounting Act may also be the basis for assessing the tax liabilities.
By introducing a qualified domestic minimum top-up tax, one objective of the legislators was to achieve the so-called QDMTT Safe Harbour status, which could mean, among others, that groups of companies resident in Hungary could choose to calculate and pay their top-up tax liability only in Hungary, thus significantly reducing the administrative burden for parent companies located in other countries.
Exemptions and Safe Harbour
The global minimum tax regime, like other tax regimes, includes a number of exemptions and reliefs. These can be temporary exemptions that simplify administration, such as the CbCR Safe Harbour rules, or transitional rules lasting several years that allow for a larger reduction of the tax base. One such option is the Substance-Based Income Exclusion (SBIE),whereby net profits are reduced by a fixed percentage of the recognised wage costs and the value of tangible assets.
As there are also direct exemptions from the top-up tax burden, which can be used to reduce the tax liability to zero, each group member concerned should consider what reliefs are available for them.
When and what kind of administrative tasks are to be expected?
Of course, there are specific procedural rules for meeting tax obligations (reporting, data supply and tax returns). As a first step, the domestic group member must notify the tax authority of the taxability. The tax return, including the top-up tax liability, will have to be filed within 15 months of the last day of the tax year. In view of the introduction of the global minimum tax, this deadline will be extended to 18 months for the transitional year (2024).
Further supplementary legislation to Act LXXXIV of 2023, which lays down the domestic rules for the global minimum tax, is expected to be published by the middle of this year. Although the deadline for the first tax filing may seem a long way off, it is worth starting the preparations now.
