Introducing global minimum taxation rules („GloBE”) in order to tackle tax evasion

The two-pillar initiative of the OECD and G20 countries was originally drafted about two years ago with the aim to combat harmful tax practices and create a fairer global system for corporate taxation.

The said draft’s second pillar was around the introduction of a global minimum tax which has been materialized in the form an EU Directive Proposal on 22 December 2021. As an important circumstance leading up to the decisive meeting of the European Commission it needs to be mentioned that a total of 137 countries, including Hungary, have joined the OECD’s two-pillar initiative.

In line with the proposed Directive, the personal scope of the GloBE applies to groups of multinational enterprises and large-scale domestic groups that have consolidated revenues of EUR 750 million in at least two out of the last four years and the groups’ ultimate parent company or any other subsidiaries are in an EU Member State. The proposed Directive defines the scope of entities that are exempted from the GloBE rules such as non-profit organizations, pension funds and investment funds that are ultimate parent entities of a group.

Provided that the effective tax rate of the in-scope entities of the proposed Directive computed together as one in a jurisdiction falls below the minimum tax rate of 15%, then GloBE rules incorporate an agreed rule order based on which the top-up tax should be collected. The so-called Income Inclusion Rule (IRR) works by imposing a top-up tax on the jurisdictions of the parent entities, if those are tax resident in an EU Member State. In contrary case, where either the parent entity is not an EU tax resident entity or the jurisdiction of the parent entity does not apply a qualifying IIR, top-up tax payment obligation will be allocated proportionately, based on the so-called Undertaxed Payment Rule (UTPR), to group entities that are in an EU Member State.

To compute the aforementioned effective tax rate of 15% on a jurisdictional basis, the covered taxes under the GloBE rules, i.e., the items recorded as income taxes for local book purposes should be divided by the calculated GloBE income (generally speaking the financial accounting net income of the local entity). The amount of jurisdictional top-up tax obligation can be reduced through substance-based income inclusion or de minimis income inclusion, provided that certain conditions are met.

The Directive obliges a constituent group entity located in a Member State to file a top-up tax information return, unless the return is filed by a group member in another jurisdiction, with which the EU Member State has an exchange of information agreement. The required return may be filed by the constituent entity or by another designated local entity located in the EU Member State on its behalf. The return must be filed within 15 months after the end of the fiscal year to which they relate to.

We emphasize that the scope of covered taxes is not yet specified, but from a Hungarian perspective, it is expected that corporate income tax, local business tax and innovation contribution will be included (while the top-up tax for GloBE purposes will be excluded).

In line with the plans of the European Commission, the Directive on global minimum tax together with the related rules should be approved by the end of 2022. Consequently, most of the provisions of the Directive should become effective from 2023 while certain rules (UTPR) are expected to be implemented from 2024.

Should you have any questions in relation to the above topic, please contact our tax advisors:

Krisztián Vadkerti
Managing Director, Tax Partner
vadkerti.krisztian@pkf.hu
Mobil: +36 70 316 9959

Gábor Székely
Tax Manager
szekely.gabor@pkf.hu
Mobil: + 36 70 326 9606