Coming up to the third and final article in our series on the global minimum tax, readers have already been introduced to the allocation methodology and the calculation mechanism used to allocate the global minimum tax. In this article, you can read about the transposition of the EU Directive 2022/2523 on the provision of the global minimum tax into Hungarian law since Act LXXXIV of 2023 (the “Minimum Tax Act“), which was adopted by the Parliament on 30 November 2023 and will enter into force on 1 January 2024.
Determination of Qualification and Scope of the Act
First and foremost, it is essential to determine which entity qualifies as a resident under the Minimum Tax Act, as this will determine who is subject to the tax obligations under the Law. The Act follows the practice in international taxation by establishing, as a general rule, the residence of an entity at its place of management and only if this is not the case, will it take into account its place of incorporation. Where an organisation is resident in two states at the same time and the states concerned do not have a tax treaty, the decisive factor in determining residence will be the state in which the higher tax liability for the tax year in question arose. If this tax liability is the same or zero, the entity will be resident in the country where the amount of the profits based on economic presence is higher; and if it is the same or zero, the entity will not be resident for the tax liabilities provided for in the law (the latter rule does not apply to ultimate parent companies). As a result, an entity will be subject to the Minimum Tax Act as a person subject to the additional tax if its place of management, or failing that, its place of incorporation, is Hungary.
Recognised domestic additional tax
A person subject to the additional tax may be subject to three types of tax liability under Section 1(5) of the Act, namely the qualifying domestic minimum top-up tax (“QDMTT”), the income imputation rule (“IIR”) and the under-taxed payments rule (“UTPR”). The European Union, while maintaining the fiscal sovereignty of Member States, has allowed the additional tax incurred to be taxed primarily in a domestic context, so where a Member State has taken the option of introducing QDMTT into its domestic law, the additional tax incurred domestically is satisfied through this method.
Hungary has taken this option and introduced the QDMTT in Chapter 4 of the Act, stating that “all low-tax group members of a multinational group of companies and a large domestic group of companies resident in Hungary under this Act shall be subject to the recognised domestic additional tax for the tax year.” The effect of this is that if the tax on all (covered) income paid by a resident taxpayer in the tax year falls below the 15% threshold required by the global minimum tax, the excess tax will not be paid in the state of residence of the ultimate parent company under the IIR rules, but will be paid into the Hungarian treasury.
The method for the calculation of the additional tax is the same for the three methodologies, namely the additional tax is the difference between the adjusted recognised profit or loss multiplied by the covered taxes as the effective tax rate and the 15% minimum tax. The Minimum Tax Act supplements the provisions of the Directive by referring to corporate tax, local business tax, innovation levy and income tax on energy suppliers as covered taxes by way of example.
The Minimum Tax Act contains important rules on the applicable accounting rules by providing for the mandatory application, under certain conditions, of the Hungarian accounting rules, the IFRS, or the accounting rules applied by the ultimate parent company in preparation of its consolidated accounts.
– The Hungarian accounting rules or IFRS rules are mandatory if all domestic group members apply the same accounting rules and determine their corporate tax liability on the basis of the same rules or, in the absence of tax liability, have had those accounts audited by an independent auditor.
– If the domestic group members keep their accounts under different rules from the two standards mentioned above (“local financial accounting standards”), the IFRS rules apply for the determination of the additional tax.
– If a domestic group member maintains its records under a non-local financial accounting standard, the Minimum Tax Act requires the application of the accounting rules used by the ultimate parent company in preparing the consolidated accounts.
– Also, the accounting rules applied by the ultimate parent company in preparing the consolidated accounts must be applied in calculating the additional tax if the tax year of a domestic group member differs from the tax year applied by the group.
Addressing some domestic tax specialtiesin the light of the minimum tax
The domestic corporate tax system allows, subject to compliance with the conditions, for deferred tax payments, which in effect reduce the amounts recognised as income in the books, then reverses them at a future due date and returns them to the corporate tax base at that time. As the methodology for calculating the global minimum tax is based on the accounting profit (and not the tax base) and compares it with the (adjusted) covered taxes, a discrepancy arises where the accounting profit still includes the profit item underlying the deferred tax payment, but the covered taxes do not. The Minimum Tax Act corrects this distortion by adjusting the covered taxes and thereby ‘adding back’ the amount of deferred tax. Prior years’ carry forward losses can also be used to adjust the balance of covered taxes.
In addition to the deferred tax, there is a problem with the treatment of tax adjustments in the calculation of the global minimum tax, as these adjustments are already reflected in the tax base. Contrary to the above, the narrow range of tax benefits taken into account by the Minimum Tax Law is not dealt with by means of adjustments to the covered taxes but by means of adjustments to the recognised gains and losses. The amount of the unrecognised tax benefits cannot be adjusted for in the accounting result, with the unfortunate result that these amounts are paid through the global minimum tax.
Deadline for filing returns and notifications
It is important to note that taxpayers have 18 months from the last day of the tax year concerned by the transitional year to fulfil their reporting and filing obligations.
