Draft Hungarian Pillar 2 global minimum tax legislation

Tax & Legal Alert | PwC Hungary | 24 October 2023

On 18 October 2023, the Hungarian Ministry of Finance published the draft legislation for public consultation to implement Council Directive (EU) 2022/2523 and the OECD Model Rules on the global minimum tax (“GloBE”).

The draft legislation mainly follows the OECD Model Rules and its Commentary, including the Administrative Guidelines published by the OECD. This means, among others, that Hungary is going to introduce:

country-by-country reporting based safe harbour legislation,
substance-based income exclusion for all top-up taxes, and
a minimum tax rate of 15%.

Scope

The scope of the regulation covers members of MNE groups and large-scale domestic groups that have exceeded the revenue threshold of EUR 750 million or more in at least two of the last four consolidated financial statements of the group’s ultimate parent entity.

When calculating the threshold in Hungarian forints, the draft legislation proposes basing the EUR conversion on the average F/X rate published by the European Central Bank for December of the preceding year.

Charging provisions

The draft legislation includes the full set of the Pillar 2 charging provisions, including the introduction of a Qualified Domestic Minimum Top-Up Tax.

The charging provisions will come into effect according to the following timeline:

Income Inclusion Rule (“IIR”) from 1 January 2024,
Undertaxed Profits Rule (“UTPR”) from 1 January 2025, and
Qualified Domestic Minimum Top-Up Tax (“QDMTT”) from 1 January 2024.

Covered taxes

The draft legislation sets its own definition for taxes that are considered covered taxes, i.e. taxes that can be taken into account for the purposes of GloBE ETR calculations. Covered taxes are taxes that are levied on income and profits recorded in the accounting records.

The draft legislation designates the following as covered taxes in Hungary: corporate income tax, local business tax, innovation contribution, and energy suppliers’ income tax. This list is not exhaustive, and additional taxes may also be treated as covered taxes in Hungary.

Deferred taxation will be introduced into the Hungarian GAAP, and companies using Hungarian GAAP can elect whether to apply deferred taxation.

Qualified Domestic Top-up Tax

Hungary will base its QDMTT on the GAAP companies use for local statutory reporting purposes (this could be the Hungarian GAAP or IFRS). If the business year of a local entity differs from that of the MNE group, the accounting standards applied by the Ultimate Parent Entity (“UPE”) when preparing its consolidated financial statements will have to be applied.

The Hungarian QDMTT will be determined based on the local GAAP (Hungarian GAAP and IFRS or a combination of the two if local constituent entities apply different GAAPs for local statutory purposes) and is intended to qualify for the QDMTT Safe Harbour. If also approved by the OECD’s peer review procedure, amongst others, this will mean that MNE groups with Hungarian presence will be able to calculate, and possibly pay, their global minimum tax in Hungary, and the Ultimate Parent Entity will be exempted from calculating Pillar 2 for its Hungarian constituent entities.

The proposed design of the QDMTT regulation follows the administrative guidelines issued by the OECD, including the provisions on the allocation of covered taxes between constituent entities. Notably, controlled foreign company taxes levied on the foreign parent entities of Hungarian constituent entities will not be allocable to Hungary for the purposes of calculating the effective tax rate for QDMTT.

Administration

The GloBE Information Return can be disclosed in Hungarian or English, and the top-up taxes can be paid in Hungarian forints, US dollars or euros.

Converting the R&D tax credit into a qualified refundable tax credit

In addition to the currently available R&D tax allowance rules (under which the cost of own R&D and of R&D subcontracted to non-Hungarian related or unrelated parties can be deducted twice from the corporate income tax base), a new R&D tax credit will be introduced. This new R&D tax credit may be a qualified refundable tax credit and, therefore, may not reduce the effective tax rate (“ETR”) for GloBE purposes, as opposed to the currently available R&D tax allowance. Companies may elect between the two types of R&D tax incentives.

The new R&D tax credit comes with certain limitations in contrast to the existing R&D tax base allowance. Recognised costs are narrower in range, as the direct costs related to certain contracted R&D services will not be treated as eligible costs.

It is also important to note that the previous tax base allowance and the newly introduced tax allowance cannot be applied at the same time. When choosing to apply the newly introduced tax allowance, the new rules also preclude the taxpayer from applying a tax base allowance under R&D, either in local business tax or in social contribution tax.

The rules on other tax credits currently available in Hungary, such as the investment tax credit, will not be amended. This may indicate that these credits will not be qualified refundable tax credits, and may therefore significantly reduce the ETR of the constituent entities.

Registration of unregistered shares will be possible until 28 February 2024

Hungary operates an elective capital gains tax exemption regime, where investments held by Hungarian taxpayers can only benefit from the capital gains tax exemption if they have been registered with the tax authority upon their acquisition. According to the draft legislation, taxpayers subject to the global minimum tax will be given a one-time opportunity until 28 February 2024 to register their shares that are otherwise not classified as registered shares.

Key takeaways

With the introduction of the global minimum tax and its Hungarian specifics, additional tasks will arise, including the following:

Qualified Domestic Top-up Tax will likely be the most frequently applied rule regarding Hungarian constituent entities, making it likely that Hungarian entities will be responsible for the calculation of them, in contrast to the Income Inclusion Rule applied by the Ultimate Parent Entity.

Disclosure obligations: A qualitative and quantitative analysis may be required to assess the potential impact of GloBE and disclose it in the financial reporting.

CbCR Safe Harbour analysis: Examining the applicability of temporary safe harbours.
Operational readiness for GloBE: Assembling data points and data flows for GloBE calculations.

How PwC Hungary can help

PwC Hungary can assist in GloBE-related tasks and provide tax and accounting advisory services:

analysing the impact of GloBE, including assistance with calculating CbCR safe harbour eligibility,
modelling GloBE ETR, considering the specific domestic provisions, and assistance with the calculation and administration of the QDMTT when introduced,
supporting the introduction of deferred tax accounting under Hungarian GAAP,
technical assistance with engaging in discussions with relevant local authorities.