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13th Apr 2024

Opinion

Hungary: why we can't support a global minimum tax

  • In principle, Hungary fully supports the fight against base erosion and profit shifting, but we believe that the fight against harmful tax competition should not become a fight against the competitiveness of tax systems (Photo: ptmoney.com)

On 1 July, the majority of members of the OECD Inclusive Framework (IF) agreed on the main building blocks of new tax legislation for the digital economy (Pillar 1) and a global minimum tax (Pillar 2).

However, some IF members, including Hungary and two other EU member states, did not join the agreement. This is why.

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The new agreement covers only a few key factors of the planned legislation, with important technical elements not yet decided upon. The agreement provides only a range for several numerical parameters and many uncertainties surround the base for the new minimum tax.

The IF plans to finalise all details by October, and an acceptable compromise should be possible by then.

However, the agreement lacks guarantees on some critical questions. For this reason, Hungary will be a constructive participant in the work that remains - but will not formally sign on to the agreement until every detail is clear.

In principle, Hungary fully supports the fight against base erosion and profit shifting, but we believe that the fight against harmful tax competition should not become a fight against the competitiveness of tax systems.

Consequently, the legislation should only cover highly mobile profits that are disproportionately high compared to the underlying level of real economic activity.

Different situations in capitalisation and inequality and differences in economic-policy priorities require different tax policies. Certain tax incentives can also significantly contribute to economic growth. Well-known examples include R&D incentives, accelerated depreciation and notional interest deduction systems, which can neutralise the effect of inflation on the tax base and the debt-equity bias.

These measures are often promoted by international organisations as well. Consequently, the regulation must fully respect countries' sovereignty to provide such incentives.

To reach that goal, normal profits attributed to substantial economic activity shall be carved out from the minimum tax base. The agreement addresses this, but the proposed rate is still very low.

While Pillar 1 exempts 10 percent of revenue, Pillar 2 exempts 'at least five percent' of the book value of tangible assets and payroll costs. Taking into account that the average revenue of MNEs is significantly higher than the sum of tangible assets and payroll, 'normal' profits exempted under Pillar 1 is on average 3 to 4 times higher than the profit carved out under Pillar 2.

Level-playing field

The proposal should also ensure a level playing field.

Minimum tax rules shall equally cover the parent company and its foreign subsidiaries. The July agreement opened the possibility of a delayed application of the Undertaxed Payment Rule (UTPR), which covers the ultimate parent entity.

Within the EU, any differentiation between the parent and the subsidiary would go against fundamental freedoms. Consequently, the EU could only adopt the rules by covering parent entities from the beginning — a serious disadvantage for EU-based MNEs.

While parent jurisdictions outside the EU could provide tax incentives, e.g., R&D tax credits without limit, EU members could not.

Therefore, Hungary cannot support the EU implementation of the rules before UTPR globally enters into force.

Additionally, the global minimum tax does not aim to harmonise tax bases but ensure a minimum level of taxation on highly mobile profits. Technical differences between tax systems will persist, and no best practice will be provided in this field.

Subsequently, the proposal needs to be flexible enough to treat these differences fairly. Companies around the world pay different taxes, with CIT often a minor part of their total tax burden. Therefore, the range of taxes used to calculate the tax base should be as broad as possible.

The treatment of tax-base differences is also a crucial issue.

The minimum tax base will be established using accounting standards of the parent jurisdictions', which differ from those in the subsidiaries' jurisdictions. Many of the differences affect only the timing of the tax liability, which may lead to double taxation if not treated adequately.

Even worse, there is no single global accounting standard to align the tax bases. CbCR data show that such differences cause significant distortions, with at least one-fifth of companies facing effective tax rates below 10 percent in the highest-tax countries. Consequently, there may be a high, unpredictable tax burden on cross-border investments.

The 2020 Blueprint of the OECD could not adequately address these issues, and while the working group has since explored more promising approaches, no final decision has been made.

Finally, the legislation should include satisfactory grandfathering rules on tax credits acquired before the agreement entered into force. Hungary provides generous tax credits to promote investment in its lagging regions under the EU's General Block Exemption Regulation. It would be unfair if these incentives ended up enriching the most developed member states' budgets.

Finding adequate solutions to address these concerns is a prerequisite for Hungary to join the final agreement in October.

Author bio

Norbert Izer is state secretary for tax affairs at the ministry of finance for the Hungarian government.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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