With or without you? Thoughts on the global minimum tax

In the past few days, five EU member states have indicated that – with or without Hungary – they will apply the provisions of the global minimum tax. The blog post below gives a general overview of exactly what this global minimum tax is and looks at what the debate is about.

First of all, what is the global minimum tax? The debate is practically about the corporate tax. This would be a type of tax that should be applied to everyone, so it is a kind of minimum tax, or we can even call it “an international corporate tax”.

The corporate income tax

The corporate tax is working as a tool in the hands of the countries. With this the tax can attract investors and capital to the country. By definition; investors will basically go where they will have to pay as little tax as possible. Of course; there are many other factors that must be taken into account in a case like this, e.g.: quality of education; cheap labor etc., so overall it assumes the building of a stable economy.

As we see, the rate of the corporate tax is the lowest in Hungary, which provides an amazing advantage in terms of competitiveness compared to other countries.

https://taxfoundation.org/corporate-tax-rates-europe-2022/

The global minimum tax

The proposal sets out how the effective tax rate will be calculated per jurisdiction; and includes clear; legally binding rules that will ensure

large groups in the EU pay a 15% minimum rate for every jurisdiction in which they operate.

We can see that this is higher than the current rate in force in Hungary. The aim of this minimum tax would be for countries not to compete with each other in order to keep corporate tax as low as possible; but rather to focus on developing education; training a quality workforce; creating a stable tax environment; or even supporting the appropriate language learning.

These are small details; the totality of which can even compensate for a “sacrifice” to be paid for a higher tax rate; so it would still be worth investing in the given country.

The proposed rules will apply to any large group; both domestic and international, including the financial sector; with combined financial revenues of more than €750 million a year; and with either a parent company or a subsidiary situated in an EU Member State.

The effective tax rate is established per jurisdiction by dividing taxes paid by the entities in the jurisdiction by their income. If the effective tax rate for the entities in a particular jurisdiction is below the 15% minimum; then the Pillar 2 rules are triggered; and the group must pay a top-up tax to bring its rate up to 15%.

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_6967

For example; as we see; the ultimate parent is in an EU member state; which has two subsidiaries in the jurisdiction of the European Union: in the first one (A), the corporate tax is 10%, in the other (B) the corporate tax is 9%. Under the Directive; the ultimate parent must pay a top-up tax to bring its rate up to 15%. This top-up tax is known as the ‘Income Inclusion Rule’. So, it must pay not only for the subsidiary “A” (15-10=5%); but also for the subsidiary “B” (15-9=6%).

There is no difference in treatment between the subsidiaries, all are taxed, at 15%.

Hungary initially supported the proposal but vetoed it in June. The result was that the 1979 tax treaty with Hungary has been cancelled by the USA.