The Impact Of The Global Minimum Tax On The Hungarian Tax System

The Impact Of The Global Minimum Tax On The Hungarian Tax System Presented by: Dr. Károlyi Date: 11 – 13 January 2025 Agenda - Relevance of the topic - The basics of the global minimum tax rules - - - • Source of the rules • Mechanism of the rules Relevant features of the Hungarian corporate tax system • Tax base • Tax rate • Tax credits Interaction of the global minimum tax rules with the Hungarian tax system • Affected provisions • Mitigating the effects • Peculiarities of corporate taxation • Legislative changes Conclusions Relevance Of The Topic - Most influential harmonization measure in the field of business taxation • Before: harmonization regarding  Tax coordination - exchange of information, disclosure rules  Mitigating the tax burden of cross-border activities - PSD, IRD, Tax merger directive  Preventing tax avoidance - ATAD 1 & 2 • GloBE: floor tax competition even in non-abusive situations  Applies irrespective of the actual structure of the corporate income tax systems of the Member States → own set of rules for calculating the ETR  More transparent but also more complicated → administrative burden on taxpayers and tax authorities Basics of the GloBE rules - - Source of the rules • OECD/Inclusive Framework • European Union Scope: MNE Group has at least EUR 750m revenue in their Consolidated Financial Statements in at least 2 of the 4 fiscal years immediately preceding the tested fiscal year - Low tax jurisdiction - Is there an ETR (effective tax rate) at a jurisdictional level of at least 15% • If not: Top-up tax obligation Step Step 1 Step 2 Step 3 Step 4 Reference a b c=b/a d = 15% -) c e f= 5% * e g = a (-) f h=d*g Step 5 Step 6 Summary GloBE income Covered Taxes Jurisdiction level ETR Top up tax percentage Tangible assets plus payroll Substance based carve-out Excess Profit Top up tax Covered Taxes - Covered taxes are broader than corporate income tax, include taxes accrued (current + deferred). - Taxes in Hungary that are expected to be covered taxes: • Corporate income tax • Local business tax • Innovation contribution • Energy suppliers' income tax - There are sectoral taxes in Hungary, which are currently unlikely to be covered taxes, but may be amended in the future. - Local business tax • Payable in each • municipality where taxpayer is active • Financial income (e.g. dividend, interest, capital gains) are excluded from the calculation • - - Tax rate: up to 2% Innovation contribution • Central tax (SMEs are excluded) • Same tax base as local business tax • Tax rate: 0.3% Basis: Turnover • Deductible  Cost of materials  COGS  Cost of mediated services  R&D  Certain royalty income • Non deductible  Labor cost  Depreciation  General service fee  Interest Globe Income - Starting point: Financial Accounting Profit and Loss • Calculated at individual financial statements of each Constituent Entity • But! On the basis of the financial accounting standard used for consolidation! → conversion - Adjustments: • Net tax expense • Excluded dividends except for short-term portfolio investment • Gains or loss from the disposition of assets • Asymmetric foreign currency gains or losses • Policy disallowed expenses • Prior errors Example- Charging Mechanisms - Potential IIR Jurisdiction • - Ultimate Parent Entity (Country A) Top Up Tax Jurisdiction • - Constituent Entity 1 (Country B) Potential UTPR Jurisdiction • Constituent Entity 2 (Country C) Step Reference Step 1 Step 2 Step 3 a b c=b/a Step 4 d = 15% -) c e f= 5% * e Step 5 Step 6 - g = a (-) f h=d*g Summary GloBE income Covered Taxes Jurisdiction level ETR Top up tax percentage Tangible assets plus payroll Substance based carve-out Excess Profit Top up tax Entity 1 Country B 2,000 100 5% Entity 2 Country C 1,000 250 25% 10% 0% 500 2,000 25 100 1,975 198 900 - Ordering Rules • 1 QDMTT • 2 IIR • 3 UTPR Main Features Of The Hungarian Tax System - Starting point of the tax calculation: profit before tax - Adjustment to reach the tax base: • Participation exemption regime - subject to reporting the shareholding to the HTA • Exemption of dividend income • IP box regime • R&D deduction (super-deduction) - Tax rate: 9% - Tax payable = tax base * 9% - Tax credits • Development tax incentive  Connected to large investment / creation of jobs  Can be received after the setup of the investment • - R&D tax credit - instead of the deduction Tax= tax payable - tax credit Impact Of The Globe Rules On The Tax Incentives - Tax Base Summary Participation exemption Effect on GloBE ETR No minimum Corporate income Reduces it shareholding tax for certain requirement: portfolio shareholder Hungarian companies might participation reduce significantly exemption rules are applicable to portfolio investments, resulting in the decrease of ETR under Pillar 2; All dividends (except dividend from CFCs) are exempt from corporate income taxes, therefore dividends receive from short-term portfolio investments will result will not be Effect on ETR excluded for Pillar 2 purposes. Super-deduction of R&D costs. Direct cost may be deductible both as an expense and as an additional tax base allowance for CIT 50% of royalty profit is deductible from the tax base and capital gains on qualifying IP are tax exempt. R&D deduction IP regime Corporate income Reduces it tax may be lowered even to 0% For royalty 4.5% Reduces it effective tax rate, for IP capital gains 0% ETR. Impact of the GloBe Rules On The Tax Incentives - Treatment Of Tax Credits Under The GloBE - QRTC • GloBE income  2000 • QRTC  144 • Adjusted GloBE income  2144 • Corporate income tax  180 • Corporate tax after credit  36 • Covered tax  180 • Effective tax rate  8,4% - Qualified refundable tax credit: Tax Credit that must be paid as cash or available as cash equivalents to the CE. • Must be paid within 4 years. • Tax credit that is paid in excess of the tax liability. - - Example: • Government subsidies • Tax refund claim paid in excess of the tax liability NQRTC • GloBE income  2000 • Corporate income tax  180 • Tax credit  (144) • Corporate tax after credit  36 • Covered taxes  36 • Effective tax rate  1,8% - Non-qualified refundable tax credit: • Tax credit that is not a qualified refundable tax credit. • I.e. a tax credit that is not paid in cash or cash equivalents but rather e.g. only reduces the tax liability up to a maximum of zero. - Example: • Special economic zones • R&D incentive (not paid in cash) • Special depreciations Impact Of The Globe Rules On The Tax Incentives - Tax Credits Summary Development tax incentive Based on amount, type, and place of investment, the the the the Effect on ETR Corporate income tax may be lowered to 1.8% Qualified refundable tax credit No Effect on GloBE ETR Reduces it taxpayer may be eligible to development tax credit up to 50% of the present value of investment. Tax credit may be utilized up to 80% of the CIT payable. Based on the direct costs of the R&D activity, can be utilized up to 70% of the CIT payable R&D tax credit Corporate No income tax may be lowered significantly for R&D intensive companies Reduces it Legislative Response - No change: • 1: Tax rate of 9%  Only affects a limited number of corporate taxpayers  No anticipated loss of tax revenue: introduction of QDMTT  Even in-scope group companies might reach a 15% ETR o Covered taxes go beyond corporate income tax → local business tax might be particularly important o Jurisdictional blending: excess covered taxes can be utilized by blending high-taxed active income with low-taxed passive income - • In the IP box regime • Participation exemption regime: to a large extent protected from GloBE impact • R&D deduction Change regarding tax credits and investment incentives • Tax credits: NQRTC - useless: incentive given in this form by the government will be washed away by GloBE - R&D tax credit • Capable of reducing the tax liability to o • Can be utilized within 4 years from the decision on eligibility if not used, it can be deemed in cash - • Cannot be utilized with other R&D tax allowances or tax credits • Calculated with reference to certain items of direct costs of R&D activity (10%) Development tax credit • remains at place • but! New form of subsidy available for GloBE in-scope companies as a cash grant for regional development investments → alternative Conclusions - Large impact on tax sovereignty • Yet!  No harmonization of corporate income tax rules  Most features of Hungarian tax incentives could remain at place  QDMTT - no significant loss of tax revenue is anticipated  Competitiveness persist: o Out of scope companies o 15% of ETR and above ➢ Competing with high tax jurisdictions with a 15% ETR ➢ Blending of high tax activities with low-tax activities to achieve 15% ETR