“Reddite ergo quae sunt Caesaris“, i.e. renderwhat is Caesar’s to Caesar, says the parableof Jesus. Throughout human history, the rightto tax has always been vested in thesovereign who has power over a givengeographical area, and taxes have beenthought of locally rather than globally – so thesaying could not go on that if the Roman emperor did not collect any taxes, you wouldhave to pay them twice to the Persian king. The introduction of a global minimum tax is therefore a historic event.
However, our three-part series is not only inspired by the civilising role of the minimum tax: we aim to show the reader which taxpayers will be affected by the new tax and under what conditions. A particular topicalityof the subject is given by the draft of the acton additional taxes to ensure a global minimum tax level, published by the Ministryof Finance on 17 October 2023, under whichseveral rules for the collection of the minimum tax would be in force and applicable as of 1 January 2024.
This article will discuss the development of the legislation, the main concepts of theproposed new tax and the mechanism forcollecting the minimum tax. The method of calculation of the tax and the proposed Hungarian legislation will be discussed in more detail in our next article.
THE STARTING POINTS
In October 2021, more than 130 countries – collectively accounting for more than 90% of global GDP – agreed to introduce a minimum tax regime for multinational companies, the “so-called “second pillar“. Shortly afterwards, in December 2021, the Organisation forEconomic Co-operation and Development(OECD) published the framework for the aforementioned second pillar, the “Global Anti-Base Erosion Proposal” or “GloBE“.
The aim of the global minimum tax set out in the second pillar is, in very simple terms, toensure that multinational groups of companies with an annual turnover exceedingthe annual turnover threshold of EUR 750 million for at least 2 of the 4 years precedingthe period under review pay the 15% effectivetax rate set under the GloBE rules in alljurisdictions where they operate. Governmental or non-profit organisations arenot subject to the GloBE rules. The framework contains de minimis rules under which parts of a multinational group of companies in a jurisdiction where its average turnover or average income is below a certain threshold may be exempt from paying the additional tax.
If, because of a country’s favourable taxregime, a taxpayer registered in its jurisdictionwould be subject to a tax rate lower than the15% rate provided for by the GloBE, thegroup would have to pay the difference in theform of a surtax. However, the allocation and assessment of the top-up tax is based on a very complex set of rules, and we will nowdescribe the key points of these rules. The rules will be presented in the light of the provisions of EU Directive 2022/2523, which imposes a global minimum tax on EU Member States.
THE COLLECTION MECHANISM
A key issue in the operation of the global minimum tax is how to enforce the 15% effective tax rate for a multinational company with a presence in several jurisdictions through its subsidiaries, given that in many countries no corporate tax has been introduced or corporate tax has been introduced, but the applicable tax rate or the effective tax liability after discounts is below the required 15%.
As mentioned earlier, companies with a presence in under-taxed countries will be subject to an additional tax, and three main rules can be distinguished for the collectionmechanism of this tax under the Directive:
– the income imputation rule (IIR)
– the under-taxed payments rule (UTPR), and
– the qualifying domestic minimum top-up tax(QDMTT).
The income imputation rule (IIR)
Under the IIR rule, EU parent companies willbe subject to additional tax on their low-taxgroup members. Under the rules, not only ultimate parent companies but also intermediate EU parent companies will be subject to tax, the latter being subject to the additional tax mechanism if the ultimate parent is located in a jurisdiction that does not apply the minimum tax rules and there is no other intermediate parent company that has a controlling interest in that intermediate parent and applies the IIR rules.
he under-taxed payments rule (UTPR)
While the IIR rules impose a tax liability onthe parent company for its subsidiaries, i.e. a “bottom-up” tax allocation, the UTPR rulefollows the opposite logic: if the ultimateparent is located in a jurisdiction that does notapply the IIR rules (and the additional tax has not already been paid by another intermediateparent under the IIR rules), the UTPR rulerequires a lower-tier subsidiary to pay theadditional tax. The operation of the UTPR ruleis illustrated in the figure below:
If more than one Member State subsidiary would become liable to pay tax under theUTPR rule, the proportion of additional tax per Member State would be calculated on the basis of a formula taking into account the number of employees and the value of tangible assets in the Member States.
Qualifying domestic minimum top-up tax (QDMTT)
The QDMTT allows Member States tointroduce an additional tax in the event thatthe effective tax paid by a subsidiaryestablished in a Member State would notreach the 15% rate expected under theminimum tax calculation method. In such a case, the group members established in thatMember State would therefore not be liable totax at the level of the parent company, whichwould pay the 15% effective tax in its country of residence. The Hungarian legislator is alsoplanning to introduce QDMTT, which wouldallow the budget to raise additional revenuefrom multinational companies operating in Hungary, which previously calculated theircorporate income tax liability on the basis of the 9% corporate tax rate.
In our next article, we will explain the methodof calculating the additional tax. If you have any questions on this topic, please contact our experts.
