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The news of the United States’ cancellation of the double taxation treaty was announced, as it is in the world today, by the Minister of Foreign Affairs and Trade, Péter Szijjártó, on his Facebook page , Saturday, July 9. According to Szijjártó, the reason was obvious: Hungary’s resistance to the introduction of the global minimum tax.
According to the minister, the European economy must now operate in a long-term inflationary war environment. He warned that if the tax burden on production companies were to increase under these circumstances, it would have a dramatic effect.
Finance Minister Mihály Varga used the same logic. While the news seemed to shock the public, Varga told state news agency MTI that the decision “was not a surprise”, adding that US Treasury Secretary Janet Yellen tipped him off by phone afterward. a meeting of European Union finance ministers in June that the agreement between the two countries could be canceled if Hungary does not change its position on the global minimum corporate tax.
Varga added that the government was officially notified of the dismissal on Friday July 8. He said the government believes the “real reason” the deal was canceled is not the states’ official explanation of tax policy and technical issues, but because Hungary has “defended 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 the concerns the Americans had now raised.
Hungary’s position on the overall minimum corporate tax has evolved over time. He had initially opposed this regime, considering it detrimental to Hungarian interests: the country has the lowest corporate tax rate in Europe. It would have to increase its tax rate to reach the minimum, robbing it of its competitive advantage.
Hungary (along with other holdouts Estonia, Ireland and Poland) aligned itself with the EU’s official stance backing the tax in fall 2021, arguing it had won concessions that made implementation fairer, including a 10-year implementation period. At that time, all OECD and G20 countries supported the tax.
So there was some surprise and frustration in Brussels when Hungary again raised its objections at the meeting of EU finance ministers in mid-June, blocking a directive on the imposition of tax minimum.
Taxing a “low blow”
Hungarian government international spokesman Zoltán Kóvács tweeted on June 15 that Szijjártó had told US Secretary of State Antony Blinken that the global tax “would mean another ‘low blow’ to European competitiveness, as it would tax more taxes to mid-war businesses.
Europe being the first to implement the tax, the foreign minister said, would also hurt foreign direct investment and put jobs at risk.
This is not the European point of view, however. “This veto has nothing to do with the [tax deal] or its technical problems,” French Finance Minister Bruno Le Maire said in June. “Nothing justifies this veto. Hungary had already agreed to this. It was a surprise.”
Since then, Hungary has come under increasing pressure to lift its veto. On July 6, members of the European Parliament adopted a resolution calling on Hungary to “immediately end its blockade”, according to the official MTI news agency. Passed by 450 votes for, 132 against and 55 abstentions, MEPs said Hungary’s “announced demands” for its support for 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 negotiations” and to “refrain from endorsing Hungary’s National Recovery and Resilience Plan unless all criteria are met.” are not fully respected”. MEPs added that if Hungary persists in its veto on the issue, alternative options should be explored to honor EU commitments, including the possible use of “enhanced cooperation”.
Tax issues are one of the few policy areas within the EU that require unanimous approval, meaning Hungary can continue to block the tax unless the European Commission changes how it works.
“We have to draw conclusions from these marathon discussions,” Le Maire said in June by Euronews. “It is essential to get rid of unanimity in tax matters and move to qualified majority and give more weight to the EU.”
Hungary is doubling its right of veto for the time being. On Monday July 11, its parliamentary economic affairs committee supported the government’s position (not surprising given the size of the majority enjoyed by Prime Minister Viktor Orbán in the National Assembly) by declaring: “By manifestly exceeding his authority , the European Parliament would force Hungary to give up its economic interests,” according to the international news wire Reuters. The news agency added that the panel called on the government to defend Hungary’s interests “by all legal means” in EU forums.
This article first appeared in the print issue of the Budapest Business Journal on July 15, 2022.