The words “flexible” and “amazing” are probably not the first that spring to mind for most people when thinking about the Hungarian tax authority (NAV). Yet EY’s New York-based international tax partner Miklós Sánta insists that, for a select group of people, those descriptions are fully justified.
“Hungary is most useful for international tax structuring,” Sánta told the Budapest Business Journal from his New York office. “It has a very unique tax regime, very flexible.”
He accepts that NAV has a reputation “for sometimes being very ‘formal’, let us say, and not as supportive as you might experience in other jurisdictions. However, for a very particular group of transactions, Hungary’s financial holding and IP regimes provide amazing solutions. [...] It is not widely known to the public, because it is only of interest to a relatively small segment of global players.”
Sánta makes the point that Hungary has always been committed to attracting investors who can bring taxable income to the country (and create jobs and products too), and that leveraging the benefits does have “a multiplier effect for the economy”.
And that brings us to one very important piece of good news for those doing business in Hungary: the reduction of the corporate tax rate to a flat 9%. “This,” Sánta says, “is huge.” When he told his clients, many thought he was joking. Hungary was already competitive at its old 19% rate. This move takes it into a whole new ball game.
“This is an extremely low tax rate – there really is no other way of describing it. [.…] The most effective way to stay at the top of the list of investment destinations is to reduce the corporate tax rate. It has already generated vast interest in terms of potential cross-border deals. The race to the bottom has begun.”
Hungary has traditionally competed with the likes of the Netherlands, Luxembourg and Ireland in attracting cross-border financial or IP holdings, Deals are relatively rare, but involve substantial amounts of money; Sánta says multinational players would not go to the time and expense of doing so for anything less than USD 1 billion, but some of the deals can be as large as USD 50 bln. Hungary’s three competitor states would find it hard to cut their own corporate tax rates much further, the tax expert argues.
While the OECD has long campaigned against so-called “aggressive tax planning”, and targeted higher tax countries who have created complex low tax structures to attract investments, the tax expert thinks Hungary has followed a logical – and beneficial – path. “With 9% corporate tax, structures become more transparent, easier to set up and maintain. It leaves substantially fewer opportunities for other jurisdictions to argue against them,” he says.
International tax advisors such as he have been trying to promote the idea of low corporate tax for about ten years, believing it would lead to incremental tax incomes for host countries. Hungary had already seen the benefits of its 19% tax rate; Sánta says one single deal in 2015, for example, generated half of Hungary’s corporate tax income for that year. This experience has “made it easier to model and calculate how much you might expect to generate in income with a lower rate”, he suggests.
The financial structures Sánta is talking about require a presence on the ground, but do not create huge numbers of jobs. As he puts it, in a USD 50 bln deal, the HR costs would amount to a rounding error. But the government also wants to bring well-paid and interesting jobs to the country to keep workers from moving abroad in even larger numbers. And there is news on this front, too.
“One of its other initiatives is a reduction in the amount of employer-related taxes and contributions – social security rates – by 4% from January 1 this year. And the government has pledged there will be further future reductions. Being competitive in employment taxation is a different ball game, but this is a step in the right direction.”
That is a lot of positives for the start of the year, but what about risk? Are there any downside dangers? “That’s a good question. It isn’t really a risk, but a very important aspect is to make sure it stays this way. It’s kind of like working out. Becoming fit is easy compared to staying fit. Foreign multinationals love good news, but they will want the rate cuts to remain in place for a good number of years – and not shoot back up – so they can do some robust modeling.”