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4 reasons for Hungary to join the Euro PLUS pact – and 4 not to

Hungary has opted out of the Euro-Plus Pact recently proposed by the European Commission. The main reason for staying out of the pact is the planned harmonization of corporate tax bases within the EU, the Hungarian government said.

The harmonization of the corporate tax base within the European Union has been on the table of the European Commission for more than a decade. Such ambitions have always provoked opposition from certain countries. In the latest proposal of the EC, the Common Consolidated Corporate Tax Base (CCCTB) is a set of rules in which the calculation of the corporate tax base of companies operating in the EU is harmonized.

The CCCTB would be optional for companies whereby they would be subject to common corporate tax base rules. Companies which do not opt in to the CCCTB would continue to work within their national systems. The proposal is part of the EU’s Euro-Plus Pact.

4 reasons to join

1. The CCCTB can make the EU a much more attractive market for foreign investors. At present, companies operating in third countries such as the US or China only have to deal with one national tax system. This compares to the EU’s 27 different sets of rules, which create far more complexity and costs. A single set of rules for the corporate tax base, and a one-stop-shop system for filing tax returns, would make the EU a much easier place for foreign firms to invest in.

2. Although the allocation method of the tax base is not yet clarified, it seems that a member state would receive from the tax base depending equally on the number of employees and wages of the given country; the size of the given country’s market; and the size of tangible assets the company has in the given member state. If the plans are realized, it could benefit Hungary – or at least, the amount of corporate tax base allocated to Hungary would not change significantly.

3. For businesses operating cross border in the EU, the CCCTB unequivocally translates into savings in compliance time and costs. It is estimated that the current costs could be reduced by 7%, which is equivalent to a saving of €0.7 billion across the EU.

4. Foreign companies operating in Hungary or planning to enter the market seek stability and simplicity when it comes to taxation. They are more worried about the “unique” Hungarian taxation system (which contains, for instance, the temporary crisis taxes) than the rate of the corporate tax in the country.

The proposal has evoked resistance from several member states, among them, in addition to Hungary, are the UK, Sweden and the Czech Republic. The Hungarian prime minister said that Hungary would not join the pact and reasoned the move by saying that Hungary wants to retain its tax independence and aims to build Europe’s most competitive tax system.

“Hungary is already taking all the necessary steps outlined in the EU’s structural pact,” the press department of the National Economy Ministry told the Budapest Business Journal. “Furthermore, the Széll Kálmán Plan contains even more ambitious measures, while it sustains the independence of the tax system.”

But some Hungarian economists think that the government is taking the wrong direction by staying out of the pact. A group of economists has written an open letter to the government, saying that the harmonization is not about tax rates but about introducing common rules and regulations concerning the corporate tax base. Defining the tax rate would still be a member state authority, they say.

If a country decides not to join the pact for the time being, it can do it any time in the future. The question of which scenario – joining or staying out – would serve Hungary’s interests in the long run can only be answered with time, but the BBJ has gathered opinions from both sides.

4 reasons not to join

1. Although the EC has clearly denied that its proposal will harmonize corporate tax rates, some see the present proposal as a step forward towards harmonizing tax rates, saying that a common tax rate will follow the common corporate-tax base.

2. If the proposal is adopted, member states would see their powers to decide the structure of their taxation systems restricted.

3. Hungary’s tax benefit system greatly relies on the corporate tax base – certain allowances, such as research and development-, culture- or sport-related ones, are deductable from the tax base. Changing it would require the modification of the whole allowance system, which would result in the elimination of certain tax benefits.

4. Under the directive member states would have to manage two tax schemes: CCCTB and their national corporate income tax, which entails further costs. Some say that there is a real danger that the CCCTB will make the EU less attractive as an investment location. The proposal’s impact assessment, published by the Commission, has not proven the case that tax compliance costs would be reduced for business. The allocation mechanism will mean that many businesses could actually end up paying higher corporate taxes.

 

 

The Budapest Business Journal would like to thank József Láng, partner and tax advisor of ABT Hungária, Zoltán Gerendy, head of BDO Magyarország Csoport, and Bálint Gombkötő, senior manager at KPMG for their contribution to this article.

This article appeared in the BBJ's Law & Tax special report on May 6, 2011.