After the presidential election in the United States, the need to develop a global minimum tax regime has come to the fore again at the OECD. On 1 July 2021, 130 countries made a common declaration to support this initiative.
Finance Ministers of the G7 group agreed to promote a global reform of corporate taxation, preventing countries with low tax rates from attracting businesses. The aim of the tax reform is to force Multinational Enterprises (MNEs) to pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence there.
The planned tax reform
At the initiative of Germany and France, the OECD began to work on a global minimum tax framework in 2019, which would reform the global taxation regime through two pillars. Based on the first pillar, MNEs should also pay tax in the countries in which they actually operate, not just where they have their headquarters. The tax base would be determined based on the consolidated accounts of the parent company. If the tax liability of the subsidiaries in each country does not reach the minimum tax rate, the tax difference would be collected primarily by the country of the parent company.
As a secondary mechanism, if the country of the parent company does not exercise the right of taxation, the nations of the subsidiaries could also collect the difference. Thus, if a state introduces tax rates or provides tax benefits that results in a lower tax burden than expected, it essentially supports the budgets of other states, which, of course, all states would try to avoid. The new legislation would apply to multinational companies operating at a profit margin of at least 10 percent and have a turnover above EUR 750 million per annum.
The second pillar is about introducing a global minimum corporate income tax rate. The OECD proposal has not yet set a tax rate, but G7 finance ministers are in favor of setting a minimum effective corporate tax rate of 15 percent.
On the 1st of July, the OECD announced that 130 countries - representing more than 90% of global GDP – endorsed the OECD proposal and the 15 percent tax rate, however, nine countries, including Hungary, refused to sign up to the deal.
The negotiations now move to a meeting of the G20 group of developed and emerging economies on July in Venice. The OECD aims to finalize the technical details of the proposal by the end of summer 2021 so that the new rules can be implemented by 2023-2024.
Concerns of Hungary
The Hungarian Ministry of Finance considers that the economic impact of the proposal may depend to a significant extent on the technical details of the proposal and has therefore been actively represented the view of Hungary throughout the negotiations. Hungary is trying to promote an agreement that restricts tax competition for real investments as little as possible, is able to flexibly deal with differences between the tax systems of individual countries, and does not hinder the spread of best tax practices.
Thus, in connection with 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.
In connection with the tax reform, the Ministry of Finance has consulted with the main Hungarian economic operators, including the professional forum of tax advisors. As a result, in future minimum tax related OECD negotiations, Hungary will primarily seek to enforce the following aspects:
- The minimum tax rate should exceed the corporate tax rate of 9% currently applied in Hungary as little as possible and the range of tax credits should be as wide as possible.
- As far as possible, profits related to real activity should be exempt from the minimum tax rules. According the current status of the proposal, a part of profits closely linked to real economic activity would be exempted from the regulation, but the basis for this would be rather narrow: the amount of the exemption would be determined in terms of depreciation and labor costs, while their respective ratios are currently unknown.
- Timing discrepancies between tax bases should to be managed as flexibly as possible, as the current draft would basically address them with a solution based on the deferral of payments above the minimum tax, so initially companies “undertaxed” due to timing discrepancies would have to pay the extra tax liability. Instead, Hungary would be more supportive of an approach based on deferred tax assets and liabilities.
- The tax reform should provide at least a temporary exemption for the previously granted tax benefits, in particular the development tax benefit.
- The new regulation should also apply to the subsidiaries operating in the country of the parent company - In Hungary's view, this is also the minimum condition for the applicability of the proposal within the EU. Under the current proposal, this could only be realized through the application of the second mechanism.
- 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 Court of Justice of the EU. 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.
- The tax reform should apply uniformly to all participants, and no different or even stricter national rules should apply.
- It should also be possible to collect the tax difference in the countries of the subsidiaries, especially as the minimum tax base is based on the parent company's reporting standards, it is not possible to follow it perfectly in national tax rules. The proposal does not currently exclude or regulate in detail the possibility of this.