How Hungary’s Position on Global Minimum Tax has Evolved

Analysis

Photo by Eviart / Shutterstock.com

The news of the U.S. cancellation of the double taxation treaty was broken, as is the way of the world today, by the Minister of Foreign Affairs and Trade Péter Szijjártó on his Facebook page on Saturday (July 9). According to Szijjártó, the reason was apparent: Hungary’s resistance to the introduction of the global minimum tax.

According to the minister, Europe’s economy must now operate in a long-term wartime inflationary environment. He warned that if the tax burden of production companies were to increase under these circumstances, it would have a dramatic effect.

Minister of Finance Mihály Varga used the same logic. While the news seemed to shock the public, Varga told state news agency MTI that the decision “came as no surprise,” adding that U.S. Treasury Secretary Janet Yellen had warned him by phone after a meeting of European Union finance ministers in June that the agreement between the two countries could be canceled if Hungary didn’t change its position on the global minimum corporate tax.

Varga added that the government was officially informed of the termination on Friday (July 8). He said the government believes the “real reason” the agreement was canceled is not the official explanation from the States involving tax policy and technical issues but because Hungary has “stood up for its own long-term interests and those of the European Union.”

Varga noted that Hungary had ratified a new version of the double taxation avoidance agreement with the United States in 2010 that addressed all of the concerns the Americans had now raised.

Hungary’s position on the global minimum corporate tax has evolved over time. It had initially opposed the scheme as detrimental to Hungarian interests: the country has the lowest corporate tax rate in Europe. It would have to raise its tax rate to meet the minimum, robbing it of its competitive edge.

Hungary (along with other holdouts Estonia, Ireland and Poland) fell in line with the official EU position backing the tax in the fall of 2021, arguing it had won concessions that made implementation more equitable, not least a 10-year implementation period. At that time, all OECD and G20 countries supported the tax.

There was some surprise and frustration in Brussels, therefore, when Hungary raised its objections again at the EU finance ministers’ meeting in mid-June, blocking a directive on imposing the minimum tax.

Tax a ‘low Blow’

The Hungarian government’s international spokesperson, Zoltán Kóvács, tweeted on June 15 that Szijjártó had told U.S. Secretary of State Antony Blinken that the global tax “would mean another ‘low blow’ for European competitiveness, as it would impose more taxes on companies in the middle of a war.”

The result of Europe being the first to implement the tax, the foreign secretary has said, would also be detrimental to foreign direct investment and endanger jobs.

That’s not the European view, however. “This veto has nothing to do with the [tax deal] or its technical issues,” French Finance Minister Bruno Le Maire had said in June. “There’s nothing to justify this veto. Hungary had already agreed to this. It was a surprise.”

Ever since, Hungary has been coming under more pressure to lift its veto. On July 6, Members of the European Parliament adopted a resolution that called on Hungary to “immediately end its blockage,” according to state news agency MTI. Passed with a vote of 450 for, 132 against, and 55 abstentions, the MEPs said Hungary’s “reported demands” to win its support of the tax measure “were already largely taken into account in the international agreement.”

The resolution also urged the European Commission and member states “not to engage in political bargaining” and to “refrain from approving Hungary’s national recovery and resilience plan unless all the criteria are fully complied with.” The MEPs added that if Hungary persists with its veto on the matter, alternative options should be explored to honor the EU’s commitments, including the possible use of “enhanced cooperation.”

Tax matters are one of the few areas of policy within the EU that require unanimous approval, meaning that Hungary can continue to block the tax unless the European Commission changes how it operates.

“We have to draw conclusions from these marathon discussions,” Le Maire was quoted as saying back in June by Euronews. “It is indispensable to get rid of unanimity in tax matters and move to qualified majority and give the EU more clout.”

Hungary is, for now, doubling down on its veto. On Monday, July 11, its parliamentary economic affairs panel backed the government’s stance (little surprise given the size of the majority Prime Minister Viktor Orbán enjoys in the national assembly), stating: “Clearly overstepping its authority, the European Parliament would force Hungary to surrender its economic interests,” according to international news wire Reuters. The news agency added that the panel called on the government to defend Hungary’s interests “with all legal means” at EU forums.

This article was first published in the Budapest Business Journal print issue of July 15, 2022.

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