Managing tax loss carryforwards within the framework of the global minimum tax

Most accounting standards, including the Hungarian Accounting Standard as of this year, permit the recognition of deferred tax assets related to tax loss carryforwards. Generally, deferred tax expenses recognized upon the release of these deferred tax assets (when tax loss carryforwards offset current year’s taxable income) can be added to the amount of covered taxes when calculating the effective tax rate for QDMTT purposes (“Deferred Tax Adjustment”). Consequently, the utilization of tax losses carried forward should not result in a drop in the effective tax rate and thus additional QDMTT liability.

In connection with this, we would like to draw your attention to the following:

• If taxpayers need to calculate their QDMTT liability in accordance with the Hungarian Accounting Standard, deferred tax accounting should be implemented at the level of the statutory books kept under Hungarian Accounting Standards in order to take advantage of the above Deferred Tax Adjustment mechanism.
• To ensure the utilization of tax attributes generated in the past, it is recommended to recognize deferred tax assets and liabilities as of the beginning of the first fiscal year subject to the QDMTT rules. In order to avoid any uncertainties, we recommend that constituent entities of in-scope corporate groups that are already subject to the QDMTT in the tax year starting in 2024 (“FY24”) recognize deferred taxes already for the fiscal year beginning in 2023 so that the deferred tax attributes are already shown in the books at the beginning of FY24.
• The QDMTT rules generally do not take into account any accounting recognition or valuation adjustments. Therefore, it is possible to consider deferred tax assets (tax losses) for QDMTT purposes that were not recognized in the books because the criteria for accounting recognition had not been met.
• In the case of tax losses generated from items that are excluded from the calculation of the qualifying income for QDMTT purposes (e.g., impairment of subsidiary shares), the related deferred tax asset can only be applied for the purposes of the QDMTT if it was generated in transactions that took place on or before November 30th, 2021.
• If the taxpayer can substantiate that its tax losses are solely attributable to items that are included in the qualifying income or loss for QDMTT purposes, the corresponding deferred tax asset (originally measured at 9%) may be recast at 15% for the purposes of the Deferred Tax Adjustment.
• Additionally, instead of applying the Deferred Tax Adjustment described above, in-scope corporate groups have the option to recognize a deferred tax asset calculated as 15% of the total jurisdictional loss incurred under QDMTT rules. This deferred tax asset can be carried forward indefinitely in time and should be utilized in profitable tax years up to 15% of the jurisdictional profit (effectively allowing the full offset of available losses against future profits). However, it is important to note that no other deferred tax items can be considered in the calculation of the effective tax rate if this election is made.

The above referred rules also point out that managing tax loss carryforwards within the framework of the global minimum tax can be a highly complex task. Should you need any professional assistance with the proper accounting and QDMTT treatment of tax losses and the related deferred taxes, please do not hesitate to contact us.