The US Treasury announced on Friday it would cancel a 1979 tax treaty with Hungary, after the country moved to block the European Union’s implementation of a new 15% global minimum tax.
A Treasury spokesperson said that since Hungary lowered its corporate tax rate to 9%, less than half of the 21% US rate, the tax treaty benefits were no longer reciprocal, according to a Reuters report. This would lead to US revenue losses and little, in return, for US business and investment in the central European country.
The global minimum tax, agreed by 137 countries in negotiations led by the Organisation for Economic Cooperation and Development, is part of wider corporate tax reform plans that address the challenges of taxing large tech companies and other multinationals that have increasingly digitalised their businesses.
One measure targets the ability of larger corporations, with a turnover of more than US$850 million, to use zero- and low-tax jurisdictions like the Cayman Islands.
The so-called Pillar Two measures would establish a minimum effective tax rate of 15% on the profits booked by companies in low-tax and zero-tax jurisdictions. There are, however, carve-outs for real, substantial activities.
The Treasury spokesperson said Hungary had made the US government’s longstanding concerns with the 1979 tax treaty worse by blocking the EU Directive to implement a global minimum tax.
“If Hungary implemented a global minimum tax, this treaty would be less one-sided. Refusing to do so could exacerbate Hungary’s status as a treaty-shopping jurisdiction, further disadvantaging the United States.”
Reuters reported Foreign Minister Peter Szijjarto said, in response, that the global minimum tax would ruin Europe’s competitiveness and endanger jobs in Hungary.
“Based on all this – no matter how hard the pressure is on us – we obviously do not support the introduction of the global minimum tax in Europe,” he said in a social media post on Saturday.
In June, Hungary blocked a vote on transposing the global tax agreement into EU law, saying it disadvantaged firms operating in Hungary at a time when the rest of the world had not implemented the minimum tax.
The risks to competitiveness were made worse by the war in Ukraine and high inflation, the Hungarian government said.
The finance ministers of EU member states first failed to reach a unanimous agreement on the EU directive aimed at implementing the global minimum tax for large corporations in March.
European Parliament adopts resolution
Last week, European parliamentarians approved a resolution in favour of the global minimum tax and called on Hungary to stop blocking the measure.
The resolution stated that in the modern-day economy, EU and global tax rules are outdated and allow for tax evasion and tax avoidance; they lead to “unacceptable competitive advantages” for multinationals over small and medium sized companies, and undermine the EU single market.
The resolution adopted with 450 for and 132 votes against and 55 abstentions said Hungary’s reported demands had been taken into account by the international agreement.
Hungary has been at odds with the European Commission, which has blocked the payment of COVID-19 recovery funds to the country over questions about Hungary’s stance on the rule of law.
The EU Parliament’s resolution urged the European Commission 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”.
Hungary’s opposition has prompted a debate about the voting system in the 27 member EU, which, only for a select few issues, including taxation, recognises the autonomy of member states by requiring unanimity at the European level.
Efforts to transition to majority voting on tax have so far been blocked by smaller EU member states.
If Hungarian opposition continued, parliamentarians said alternative options to fulfil the EU’s commitments should include the possible use of ‘enhanced cooperation’.
Enhanced cooperation is a procedure where a minimum of nine member states are allowed to set up advanced integration or cooperation in a particular field within the structures of the EU without all member states having to be involved.
One such example is the Schengen agreement which abolished border controls between members of the scheme.
Delay likely
The OECD has set a deadline of 2023 for the implementation of the global tax agreement.
However, while Hungary’s opposition has stalled EU efforts, adoption is also hitting obstacles in the US Congress.
In particular, the so-called Pillar I rules, which reallocate taxing rights for a portion of the profits of the world’s largest tech companies, are facing Republican opposition.
This led OECD general secretary president Cormann to indicate that Pillar I would be delayed until 2024.
Meanwhile, the UK government announced last month that its implementation of Pillar 2 legislation will be delayed until calendar year 2024.
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