EU’re not alone: Hungary’s stance on corporation tax causing angst beyond Brussels

It was hailed as a huge breakthrough at the time.

In October last year, in a measure co-ordinated by the Organisation for Economic Co-operation and Development (OECD), 136 countries and jurisdictions around the world agreed to set a minimum global rate of 15% for corporation tax.

Even a number of countries previously opposed to the idea came around to it, most notably Ireland, whose 12.5% rate of corporation tax is credited with attracting billions of euros worth of business to the country.

Yet there remain some holdouts. Among the most notable is Hungary, where, today, Prime Minister Viktor Orban‘s ruling Fidesz party reiterated its opposition.

The economic affairs panel of the Hungarian parliament, a body dominated by Fidesz members, issued a statement in which it said it rejected “political pressure against the protection of Hungary’s economic interests”.

Hungary’s opposition to the tax is, however, threatening to up-end the whole thing.

It has already held up a vote in the European Parliament that would have made the minimum tax rate part of EU law while, at the same time, heightening tensions between Hungary and the EU in a way that is reminiscent of some of the opposition to the EU that was seen in the UK parliament in the decades leading to Brexit.

Hungary dislikes the idea because it believes it will render its economy and its businesses less competitive. The country currently has a corporate tax rate of 9% and argues it should have the right to retain that if it wants.

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The EU has retaliated by threatening to hold up the payment of recovery funds – worth up to €15bn (£12.7bn) – to Budapest while the row also promises to revive the debate in the European Parliament about whether individual countries should continue to enjoy a veto on tax matters – which must at present be unanimously agreed on by all 27 member states.

A number of MEPs have already argued that, if Hungary persists with its opposition, alternatives to national vetoes on tax matters should be looked at again – including the possible use of “enhanced co-operation”, a euphemism for majority voting.

There are also signs that some EU governments are coming around to this point of view.

‘Europe can no longer be held hostage by ill will of some members’

Bruno Le Maire, the French finance minister, said earlier this month: “This global minimum tax will be implemented in the coming months, with or without the consent of Hungary.

“Europe can no longer be held hostage by the ill will of some of its members.”

Hungary’s move has served to worsen relations with other EU member states because it comes just weeks after it threatened to hold up EU sanctions against Russia over its war in Ukraine.

The country’s insistence on continuing to receive Russian oil and its decision not to take part in the delivery of weapons by NATO members to Ukraine has caused much unhappiness across the bloc – as has its reluctance to impose sanctions on Vladimir Putin and supporters and members of his regime.

US axes tax treaty with Hungary – ‘the benefits are no longer reciprocal’

But now Hungary has an additional problem – because the US has waded into the row. The Biden administration announced over the weekend that it is tearing up a tax treaty with Hungary that dates back more than four decades.

The treaty, signed in 1979, aims to remove residents from the two countries from the risk of paying taxes on the same income to both.

A spokesperson for the US Treasury said that, now Hungary’s corporate tax rate was half that of the US rate of 21%, the 1979 treaty unilaterally benefited Hungary, adding: “The benefits are no longer reciprocal – with a significant loss of potential revenues to the United States and little in return for US business and investment in Hungary.

“Hungary 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.”

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Budapest has responded grumpily to the move.

Peter Szijjarto, the foreign minister, said in a post on Facebook: “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. And we continue our professional consultations on tax issues with our Republican friends.”

That was a reference to the fact that some Republicans in US Congress have written to Hungary’s ambassador to the US to offer support.

Nonetheless, Hungary’s currency, the forint, fell by almost 2% against the dollar on the news. Some 405 forints are now required to buy one dollar – up from 324 at the beginning of the year and just 300 this time last year. The forint also fell against the euro.

The falls confirm the forint to be Europe’s worst-performing currency this year – something that, along with Hungary’s June inflation rate of 11.7%, last week prompted the National Bank of Hungary to raise the rate on its one-week deposit facility from 7.75% to 9.75% and its main policy rate from 5.9% to 7.75% at the end of June.

Mr Orban and his government will argue he is defending a principle.

But he is finding out that when you are up against both the US and the EU, defending principles can come at a cost.