U.S. Termination of Double Tax Treaty ‘not Expected to Hurt Real Economy’
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News that the U.S. Treasury was moving to terminate the 1979 double taxation treaty with Hungary has left many alarmed about the potential damage to the local business environment.
Cross-border taxation treaties are complex, and, as of now, the full impact may well depend on the detailed follow-up legislation. However, when consulted by the Budapest Business Journal, one Hungarian expert familiar with international taxation matters said the U.S. move was not likely “to meaningfully affect the real economy.”
Given the lack of detail as of now and the resulting legal uncertainty, the expert spoke on condition of anonymity. Here are his edited comments:
“In general, this step is a typical example of it looking larger than it really is. A double tax treaty is first and foremost to protect a company or an individual from being taxed on the same item of income by two countries without limits. This could happen where a country from which an item of income is sourced taxes that income by way of a so-called withholding tax, while the country of the recipient also levies a tax on it.
“In such situations, the treaty kicks in and, in general, limits the right of the source country to tax the income at full rates of tax to reduce double taxation. As for Hungary and the U.S., this means that, first and foremost, the treaty is there to limit the application of these withholding taxes.
“The U.S. applies such withholding taxes at a high rate of approximately 30%, while Hungary, in general, does not apply a withholding tax at all. As a result, terminating the treaty would affect investments from Hungary to the U.S., while it is not expected to have a significant impact on investments from the U.S. to Hungary.
“Given Hungary is a small open economy with the potential to import capital rather than export it, the termination of the treaty is not expected to meaningfully affect the real economy. Another curious aspect is that the treaty is deemed terminated in the following calendar year after a six-month period has elapsed from the U.S. notification about its intention to terminate. Given this notification was sent to Hungary only in July, the treaty is meant to expire only in 2024 at the earliest, whereas if the notification had been sent in June, the treaty would have been invalid from 2023.”
This article was first published in the Budapest Business Journal print issue of July 15, 2022.
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