Norbert Izer, State Secretary for Tax Affairs, has penned an opinion piece for euobserver which outlines the government's stance on why Hungary can't support a global minimum tax.
Izer writes that on July 1, 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.
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 finalize 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 capitalization 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 organizations 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 assests 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.
Read the full article here.