Friday, 10 May 2024

The new Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two legislation in Hungary, which includes the Income Inclusion Rule (IIR) and a Qualified Domestic Minimum Top-up Tax (QDMTT) effective from January 1, 2024, aims to ensure multinational entities (MNEs) pay a minimum corporate tax rate of 15%. This contrasts with Hungary’s lower domestic rate of 9%. To mitigate the immediate impacts of this legislation on businesses operating in Hungary, transitional safe harbor rules based on country-by-country reporting (CbCR) have been adopted.

Accessing these safe harbors can defer the effects of the global minimum tax and reduce administrative burdens. However, the application and qualification for these safe harbors are contingent on meeting specific tests: the de minimis test, the simplified Effective Tax Rate (ETR) test, and the routine profits test. These tests help determine whether a company can temporarily avoid additional top-up taxes.

Key financial elements, such as penalties from prior tax assessments and the timing of deferred tax assets (DTAs) recognition, could significantly influence the effective tax rate and thus eligibility for safe harbors. Companies need to accurately identify and report these elements in their CbC Reports to qualify for safe harbors.

Detailed rules for these safe harbors are still to be specified by the Hungarian government, following guidance from the OECD. It’s crucial for companies to carefully analyze their financials and consult with auditors to ensure compliance and to strategize effectively under the new tax framework. The ability to meet safe harbor tests not only affects tax liabilities for the current year but also extends to future years under the transitional provisions.