Recently, along with the American Jobs Plan, President Biden has proposed a comprehensive US tax reform, the Made in America Tax Plan, which aims, among others, to implement a series of corporate tax reforms to address the profit shifting practice of multinational corporations and offshoring incentives and to level the playing field between US and foreign corporations.
Details at the moment are scarce, however, it is clear that President Biden is proposing not only to change the US tax system significantly but to jumpstart an international tax reform as well (which is also in line with the OECD’s proposals).
The US tax reform might have an indirect effect in Hungary as well, as President Biden is also proposing a global agreement on a strong minimum tax through multilateral negotiations to encourage other countries to adopt strong minimum taxes on corporations similarly to the US.
Along with the President’s initiative, the OECD’s global minimum tax proposals (GLOBE; Pillar Two) is more likely to be returned to the spotlight, on which the OECD has been working since 2019 to address challenges on harmful tax competition. The proposed tax rate is still unknown, most of the official statements mention a tax rate of 12,5%; however, due to the US tax reform this tax rate might be even higher. The main features of the current OECD proposal are as follows:
- The determination of the minimum tax base would be based on the accounting standards of the ultimate parent company supplemented with specific adjustments.
- According to the proposal the OECD minimum tax system would include a number of taxes, in case of Hungary not only corporate income tax but local business tax would also be included.
- If the tax collected from a subsidiary does not reach the specified minimum level, as a general rule the country of the parent company will be entitled to collect the difference from the parent company.
As Hungary has currently the lowest corporate income tax rate in the European Union – which is also considered as a low tax rate among OECD countries – the possible introduction of a global minimum tax might have its downsides for Hungary: Hungary might have to revise its 9% tax rate or modify its local business tax regulation in order to meet the requirements proposed by the OECD.
Besides the global minimum tax, the most important proposals of the Biden reform are as follows:
- Setting the corporate tax rate at 28%
According to the Made in America Tax Plan, the corporate tax rate will increase from 21% to 28% in order to achieve a higher US corporate tax revenue.
2. Global minimum tax for US multinational companies – revised GILTI regime
Significant changes can be expected to the current “global intangible low taxed income” (“GILTI”) regime implemented by the Tax Cuts and Jobs Act in 2017:
- The effective tax rate on GILTI for corporate taxpayers would increase from 10.5% to 21%.
- GILTI would be required to be determined on a country-by-country basis.
- The tax exemption for the first 10 percent return on foreign assets would be removed.
At the moment, it is unclear whether the above changes of the GILTI regime will be applicable to all US tax residents (including private individuals) or only to corporations.
3. Minimum book tax
The tax reform would impose a 15% minimum corporate tax on large, multinational corporations based on their “book income” (the income corporations use to report their profits to investors) if their tax liability does not reach the amount calculated with the minimum tax rate.
4. Payments between related parties
According to the proposal certain payments to foreign related parties in countries not adopting the minimum tax rate cannot be deducted in the US.
5. Prevent US corporations from inverting or claiming tax havens as their residence
The President’s plan also seeks to strengthen the anti-inversion provisions preventing US corporations from merging with foreign corporations and reducing their US federal income tax while retaining management and operations in the United States. However, details on the implementation are not available yet (e.g., whether tax would be imposed on the merger, or whether such a resulting foreign corporation would be treated as a domestic US corporation).
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Based on the above, major changes can be expected to the US corporate taxation system, which might have effects on the OECD countries, including Hungary as well.