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Chambers support regional tax competition

At a gathering of AmChams from around the region, participants saw a need to maintain different tax regimes, even while working together to eliminate loopholes for multinationals.

Tax regimes are different among the countries of Central and Eastern Europe, and that is a good thing, according to Farkas Bársony, managing director of GE Hungary. “We have tax competition that enhances growth in the region,” he said. “We should maintain that healthy tax competition.”

Bársony was addressing the 10th annual regional tax conference, hosted this year by the American Chamber of Commerce in Hungary at the Budapest Marriott Hotel on April 15. Every year, the conference brings together the AmChams of Hungary, Poland, Czech Republic and Slovakia to discuss tax issues.

While other conferees agreed there are benefits in maintaining competitive, and therefore different, tax regimes, one overarching theme of the conference was an effort to unify regimes through the base erosion and profit shifting (BEPS) project, the development of which is being overseen by the OECD. The goal of the BEPS project is to find a way to ensure that global enterprises pay taxes in all the countries where they operate. The G20 group of leading economic nations asked OECD to come up with recommendations “for a coordinated international approach to combat tax avoidance by multinational enterprises by creating a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax”. 

Qualified optimism

Robert McCafferty, vice president of financial supply chain design for Flextronics, suggested the new approach could boost outsourcing to companies such as his. BEPS, he said, is a “tremendous opportunity for the world economy, and particularly this region”.

András Lénárd, head of the tax department at Magyar Telekom, was broadly hopeful, but pointed out “the administrative burden will increase, that is for sure, but we do not know yet what the gains will look like”. And he added one other warning: “Politics can make the project last a lot longer.”

Speaking on a later panel, McCafferty said: “I have seen a lot of changes in development, in particular in this region, that I think are really exciting. I also think there has never been a better time in my 30-plus years to be in the tax arena. You are part of the business; it is on you to drive the business into more efficient, more beneficial structures that’ll drive value to the company. The first thing I’ll say after 30 years in tax: There’s no such thing as a tax plan; it doesn’t exist. There’s a business plan that can include tax in the thinking and in the design, and that’s a good business plan.”

A race to the bottom

Earlier, Zoltán Pankucsi, deputy state secretary at the Hungarian Ministry for National Economy, had made clear his government’s position: “We are in favor of implementing the BEPS program, but we are still against real tax harmonization. We want to maintain our very competitive tax environment.”

Tomas Balco, general state council at the Ministry of Finance of the Slovak Republic, warned that care must be taken in finding the balance between fighting “aggressive” (i.e. borderline illegal) tax planning and encouraging business. “What are the measures that will kill the business and kill the innocent, and what are the measures that will really actually address the problems that we are facing in terms of the BEPS practices?”

Monika Laskowska, deputy director of the department of income taxes at the Polish Ministry of Finance warned, “In corporate taxation we see a race to the bottom” and said her country, like Slovakia, was going through a process of careful examination of the most beneficial way forward. “We are happy with the BEPS project, but would like implementation to go in very small steps, not to surprise people.”

Hybrid Model

Marcin Petrykowski, managing director and head of relationship management for EMEA and regional head for CEE at Standard & Poor’s Ratings Services outlined why, from an investor and capital market perspective, the outlook for the regionʼs countries is good: “Central and Eastern Europe today offers a very attractive hybrid between an emerging market and elements of a developed economy. This means that more and more investors that were historically emerging markets investors are turning toward Central and Eastern Europe in a similar way to how developed markets are approached. The mix is very important and the region benefits greatly from it.”

Growth of GDP per capita is far greater than in Western Europe, though starting from a lower base, he noted. “On the other side, as the population becomes more wealthy and there is better allocation and distribution of the wealth, that means there are more opportunities for business development and business growth.”

The regulatory environment is also a positive. “A lot of investors from the emerging markets space are very focused [on the fact] that Central and Eastern Europe offers this blend of the European Unionized approach with, still, upside for development.”

There remains “significant differentiation in terms of countries” Petrykowski pointed out, with a spread in risk for the region going from “AA-”, the rating for Czech Republic, to a single “B”, which is Bosnia and Herzegovina. “It is a huge divergence. That is important to keep in mind: Central and Eastern Europe cannot be treated as one unified region.”