Hungary’s Pathway to Joining the Global Minimum Tax Agreement

In the spring of this year, Hungary’s foreign minister Péter Szijjártó and state secretary Norbert Izer were making statements such as “It has become clear over the past decade that raising taxes is a dead-end-street,” and “[the] global minimum corporate tax rate is a ‘violation of financial sovereignty.’”

Five months later, Minister of Finance Mihály Varga announced that the Hungarian government had successfully enforced the country’s interests concerning the global minimum tax.

The leaders of the world’s 20 biggest economies, the G20, endorsed a global minimum tax of 15% on large multinational businesses at the end of the G20 summit in Rome this October.

The tax rules, part of a reform plan inked by almost 140 nations, aim to make it harder for multinational corporations, including giants like Google, Amazon, Facebook, Microsoft, and Apple, to avoid taxation by establishing offices in low-tax jurisdictions.

The rules will also aim to end decades of tax competition between governments to attract foreign investment.

The Organization for Economic Cooperation and Development, which steered the tax negotiations, estimates the minimum tax will generate USD 150 billion in additional global tax revenues annually. It says taxing rights on more than USD 125 bln of profit will also be shifted to the countries where they are earned from the low-tax countries where they are currently booked.

Work in Earnest

The OECD started to work in earnest on the idea of a global minimum tax in 2019. This July, the organization said that 130 countries and jurisdictions, representing more than 90% of global GDP, had joined a statement establishing a new framework for international tax reform. A small group of the so-called Inclusive Framework’s 139 members had not joined at that time, the organization said.

Back then, Hungary’s State Secretary for Tax Affairs, Norbert Izer, said Hungary supported the fight against base erosion and profit shifting but believed that the fight against harmful tax competition should not become a fight against the competitiveness of tax systems.

Besides Hungary, only two other European countries, Ireland and Estonia, did not join the initiative; Hungary stayed out mainly because it said there were many uncertainties at the time. However, as plans were finalized in October, an acceptable compromise was made, according to the Hungarian government.

“We have succeeded in having Hungarian interests enforced,” Minister of Finance Mihály Varga announced on his social media page.

The Hungarian standpoint had been that the government would only adopt a global minimum tax that would not lead to a tax increase in Hungary or endanger the competitive advantage of the Hungarian economy but did protect the workplaces of its people.

Most importantly, Hungary ensured that its corporate tax rate would not change and could remain at a record low of 9%. The finance minister said that the country would be able to collect the global tax using a targeted solution.

Fictive Activities

According to the government portal kormany.hu, Hungary also succeeded in achieving that genuine business activities do not have to be taxed. This means that company assets and wage payments may be deducted from the rate of tax using a special method of calculation; companies that perform activities that involve tangible assets and the actual payment of wages, as opposed to fictive activities, will be eligible for this concession.

It is also beneficial for Hungary that, according to the deal, a special rate of tax will be valid for a transitional period of 10 years, meaning that for this period, the rate of tax will be calculated using a reduced tax return and using a reduced tax credit.

Hungary started to soften its viewpoint on the global minimum tax following an exchange between Minister of Foreign Affairs and Trade Péter Szijjártó and his American counterpart U.S. Secretary of State Antony Blinken at the beginning of October.

At the meeting, Szijjártó reminded Blinken that the Hungarian government would not accept the introduction of a global minimum tax, and the public had backed the stance in July in one of the country-wide “national consultations” the government periodically runs.

The U.S. Secretary of State “indicated that this is a very important issue for the United States, so they would like to see an agreement,” Szijjártó had said in a Facebook post following the meeting.

The foreign minister emphasized that the Hungarian government was “ready for a compromise if they can agree on a regulation that does not harm the Hungarian economy and does not endanger Hungarian jobs,” the foreign minister wrote in his post on October 7. “Based on today’s talks in Paris, I think there is some chance of that.”

Just a few days later came Varga’s announcement about Hungary joining the agreement.

Numbers to Watch in the Coming Weeks

The Central Statistical Office will publish data on September industrial production on November 5 and release retail trade statistics for September on the same day. On November 9, the October consumer price index will be published.

This article was first published in the Budapest Business Journal print issue of November 5, 2021.