So what was the goal then? More revenues? Not really. Tax revenues are expected to drop by HUF 145 billion as a result. More jobs? Maybe, but the reduction of employer’s wage taxes would have been a more efficient way. Higher value added? Probably, but value added is much more driven by the availability (or non-availability) of other factors, such as infrastructure, skilled human resources, the degree of bureaucracy, etc.
But before burying the measure completely, let us take a look at the other side. The announcement was extraordinary, indeed. The news about an EU and OECD member state (and not a sunny little island!) where all taxpayers shall pay such a small amount of tax spread like wildfire in the international financial world. Hungary is not like Malta or Luxemburg, where, due to the low population, real local production or service activity does not exist, thus these countries are rather used to facilitate internationally mobile services (and foreign tax authorities treat them accordingly as a result). Hungary is a moderately populated EU member state like Austria, Sweden or Czech Republic. There are only eight member states with significantly more inhabitants; so Hungary itself is an important economic player. Further, this is not a hidden privilege to a small circle of companies, there is no need to apologize to Brussels (who has by the way a number of disputes with Hungary on state aid).
And truly, HUF 145 bln is not the end of the world. This is only 20% of the 2016 corporate tax revenues and 1.35 % of the state revenues in total. So it could be a really good investment if, as a consequence, Hungary is seen internationally as a low-tax environment – let us not forget about the flat 15% personal income tax rate, either.
Some countries may not welcome Hungary’s 9% tax rate however. A number of OECD countries do not treat dividends as exempt from taxes if the tax rate is too low in the source country. As a result, the group’s overall tax burden can be even higher than if everything had remained unchanged. Some multinational companies will be forced, at best, to transform their shareholding structure or, at worse, to move their activities somewhere else. Due to the sudden and surprise-like nature of the announcement, it seems unlikely that anyone has assessed the impact of this before the announcement. Another, rather odd, negative impact could be that deferred tax assets made for tax losses or tax allowances to be utilized in the coming years will need to be written off. Although this is more a matter of financial reporting rather than a cash flow issue, it might have an adverse effect in the short-term.
In the absence of impact studies, we can only guess what the actual effects will be. My opinion is that the end result will be a somewhat positive, but… Reducing the corporate tax rate would have provided a once in a lifetime opportunity to develop a state and regional tax rate instead of the local business tax system. Because local business tax, in fact, is a problem. It is an above-the line item, it distorts and hinders competition and it helps the underdeveloped regions less than the developed ones, so it is also unfair. Hungary, for almost 30 years, has been unable to break out of the trap of the local business tax. It may be time to do something about that as well.
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