Hungary’s stance on corporate tax sparks angst beyond Brussels

It was hailed as a huge breakthrough at the time.

© Reuters
Viktor Orban, Hungarian Prime Minister

In October last year, in a measure coordinated by the Organization for Economic Co-operation and Development (OECD), 136 countries and jurisdictions around the world agreed to set a minimum aggregate rate of 15% for corporation tax.

Even a number of countries previously opposed to the idea have joined, especially Irelandwhose 12.5% ​​corporate tax rate is credited with attracting billions of euros of business to the country.

However, there are still holdouts. Among the most notable is Hungary, where today the Prime Minister Victor OrbanThe ruling Fidesz party reiterated its opposition.

The Hungarian parliament’s economic affairs panel, a body dominated by Fidesz members, issued a statement in which it said it rejected “political pressure against the protection of Hungary’s economic interests”.

Hungary’s opposition to the tax, however, threatens to upend everything.

He has already delayed a vote in the European Parliament that would have enshrined the minimum tax rate in EU law while heightening tensions between Hungary and the EU in a way reminiscent of some of the opposition to the EU that was seen in the UK parliament in the decades leading up to Brexit.

Hungary doesn’t like this idea because it thinks it will make its economy and businesses less competitive. The country currently has a corporate tax rate of 9% and says it should be allowed to keep it if it chooses.

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The EU has hit back by threatening to suspend the payment of recovery funds – worth up to 15bn euros (£12.7bn) – to Budapest, while the line also promises to revive the debate to the European Parliament on whether individual countries should continue to have a right of veto in tax matters – which currently has to be accepted unanimously by all 27 Member States.

A number of MEPs have already argued that, if Hungary persists in its opposition, alternatives to national vetoes on tax issues should be reconsidered – including the possible use of ‘enhanced cooperation’, a euphemism for the majority vote.

There are also signs that some EU governments are coming around to this view.

“Europe can no longer be held hostage by the ill will of certain members”

Bruno Le Maire, France’s finance minister, said earlier this month: “This global minimum tax will be implemented in the coming months, with or without Hungary’s consent.

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“Europe can no longer be hostage to the ill will of some of its members.”

Hungary’s move has soured relations with other EU member states, as it comes just weeks after it threatened to suspend EU sanctions against Russia over its war in ukraine.

The country’s insistence on continuing to receive Russian oil and its decision not to participate in the delivery of arms by NATO members to Ukraine has caused much discontent throughout the bloc – as has its reluctance to impose sanctions on Vladimir Putin and his supporters and members of his regime.

US enters tax treaty with Hungary – ‘benefits no longer reciprocal’

But now Hungary has an additional problem – because the United States has floundered in the row. The Biden administration announced this weekend that it is tearing up a tax treaty with Hungary that dates back more than four decades.

The treaty, signed in 1979, aims to shield residents of both countries from the risk of paying taxes on the same income to both.

A US Treasury spokesperson said that now that Hungary’s corporate tax rate was half the US rate of 21%, the 1979 treaty unilaterally benefited Hungary, adding: “The benefits are not more reciprocal – with a significant loss of potential revenue for the United States and little return for American business and investment in Hungary.

“Hungary has aggravated the US government’s long-standing concerns over the 1979 tax treaty by blocking the EU directive to implement a global minimum tax.

“If Hungary implemented a global minimum tax, this treaty would be less one-sided. Failure to do so could exacerbate Hungary’s status as a treaty-trading jurisdiction, further disadvantaging the United States.”

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Budapest reacted grumpily to this decision.

Peter Szijjarto, the Foreign Secretary, said in a Facebook post: “Based on all of this – however much pressure is put on us – we obviously do not support the introduction of the Global Minimum Tax in Europe. And we are continuing our professional consultations on tax issues with our Republican friends.”

This was a reference to the fact that some Republicans in the United States Congress wrote to the Hungarian Ambassador to the United States to offer their support.

Nevertheless, the Hungarian currency, the forint, fell almost 2% against the dollar on the news. Some 405 forints are now needed to buy a dollar – compared to 324 at the start of the year and only 300 at the same time last year. The forint also depreciated against the euro.

The falls confirm that the forint is Europe’s worst performing currency this year – something which, together with Hungary’s inflation rate of 11.7% in June, prompted the National Bank of Hungary to raise the rate of its one-week deposit facility of 7.75% last week. at 9.75% and its main key rate from 5.9% to 7.75% at the end of June.

Mr. Orban and his government will say that he defends a principle.

But he discovers that when you’re up against both the US and the EU, standing up for the principles can come at a cost.