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U.S. Ending Tax Treaty With Hungary

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The Treasury Department has begun dismantling the United States’ tax treaty with Hungary, (see Payroll Guide ¶21,475) whose government recently blocked the European Union from finalizing details of an international agreement to set a 15% global minimum tax on the biggest multinational corporations.

On July 8, the Treasury Department issued a statement citing Hungary’s reduction of its domestic corporate income tax rate to 9.9%—less than half of the 21% U.S. rate—as cause for severing the bilateral tax treaty, which took effect in 1979.

A Treasury spokesperson told reporters the treaty’s benefits were no longer mutual. “There is a substantial loss in potential revenue to the United States, and very little return on investment by U.S. businesses in Hungary,” they said.

The timing of the treaty termination suggests President Joe Biden’s administration is seeking to pressure Viktor Orbán, Hungary’s prime minister, to implement the 15% global minimum tax brokered by the Organization for Economic Cooperation Development. The deal, reached in October, has been signed by about 140 countries and territories.

Without mentioning Hungary’s move in mid-June to block an EU directive on establishing the minimum tax, the Treasury spokesperson said the country had “made America’s long-standing concerns about the 1979 tax treaty worse.” At the time, Hungarian Finance Minister Mihály Varga told a meeting of EU finance ministers that inflation and the Russian-led war in Ukraine would ensure harm to European economies if the minimum tax were established now.

Officials in the Biden administration and at the European Commission, the EU’s executive body, have said the Orbán government’s refusal to implement the tax could exacerbate Hungary’s status as a tax treaty-shopping country, disadvantaging allies and trading partners.

While the EU generally requires decisions with legal force to be approved by all 27 member states, officials who have championed the bloc’s participation in the tax have said they remain steadfast, with or without a Hungarian presence.

Hungary’s resistance has been met with praise from some congressional Republicans. Reps. Adrian Smith of Nebraska and Mike Kelly of Pennsylvania, who serve on the House of Representatives’ tax-legislating Ways and Means Committee, wrote to the Hungarian ambassador in the U.S. to express shared concerns over the tax deal and to encourage more dialogue.

In a statement July 8, Smith criticized the Biden administration’s move, saying “unelected bureaucrats at the Treasury Department” were targeting countries over their tax laws.” He called on Treasury Secretary Janet Yellen to reopen the agreement to ensure they protect U.S. jobs, companies, and competitiveness.

On July 11, those calls were joined by Sen. Mike Crapo of Idaho, top Republican on the Senate Finance Committee, and his House Ways and Means counterpart, Rep. Kevin Brady of Texas. “Treasury’s latest tactic to force implementation of the OECD agreement is to withdraw from a longstanding bilateral tax treaty approved by Congress,” they said in a statement. “This is a transparent attempt to bully Hungary into hasty action on a global minimum tax and interfere in an internal European Union policy-making process.”

Crapo and Brady expressed concern that “Treasury’s go-it-alone approach” to the global deal would increase tax uncertainty, cause more disputes among countries, and lead to fewer American jobs.

Hungary nearly halved its corporate tax rate to 9.9%—lowest in the EU—from 19% in 2010. Since the OECD-led deal was signed in early October, Hungarian officials have insisted that its support would depend on the agreement not impinging on their country’s economy or employment.

 

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