Hungary seen saying no to a global minimum tax in unexpected policy U-turn

The brief proposal of the committee is that Parliament, in view of the "new world economic situation caused by the war between Russia and Ukraine", with particular regard to the "wartime inflation and wartime economic crisis", opposes the adoption of a draft Council directive on the minimum global tax rate applicable to multinational groups in the EU.

This decision shall enter into force on the day following its publication, it added.

This suggests that the government (although this is "only" a parliamentary committee with Fidesz MPs in majority) no longer supports the application of a global minimum tax. And yet, last October, Finance Minister Mihály Varga announced that Hungary agreed to join the agreement on a global corporate minimum tax as the conditions it proposed had been met.

Erik Bánki, Chairman of the committee, told state-run newswire MTI late on Monday that adopting the EU directive on a global minimum tax would damage competitiveness.

The politician complained that the necessary expert work was not progressing at the appropriate pace. At a global level, the OECD had an initiative to tax digital multinationals uniformly, and as these companies "dodge tax", there is agreement on this initiative from virtually all countries concerned, he said.

He added that this would have been introduced in 2023, but will be delayed by at least a year. He said that another initiative had also been launched to introduce a global minimum tax, which would now apply not only to digital companies, but to all corporations.

However, it would not be fortunate if the basic proposal was preceded by this additional proposal on the global minimum tax, which, by the way, will largely affect foreign companies operating in Hungary. The detailed rules should be clarified, the most important of which is the avoidance of double taxation, as this would discourage investors, he said.

Opposition MP Bence Tordai said the proposal was adopted and hence can be discussed in Parliament.

"The balance between the two pillars of the proposal to tax multinationals has been upset. We do not see any guarantee that the other OECD proposal to reform the taxation of large companies, the so-called Pillar 1 proposal, will proceed according to the original timetable in parallel with the introduction of the global minimum tax. This violates the original compromise and thus Hungarian interests. 

"Pillars 1 and 2 on the global minimum tax were adopted by the OECD as a single package in the October 2021 Declaration, meaning that the adoption of the global minimum tax proposal should go in parallel with the progress of Pillar 1," the committee argues.

In the current context of a war-torn economy,

there is an extremely high risk for the competitiveness of the European Union and - above all - Hungary, if the European Union introduces the rules prematurely.

Businesses would have little time to prepare to comply with the highly complex rules, which would also entail a considerable administrative burden," the explanatory memorandum concludes.

In the light of last October's developments, the current proposal from the governing party may be considered unexpected, but not so surprising after the government's moves last December and January this year.

In January, we reported that the finance ministers of three EU member states, Hungary, Poland and Estonia, openly indicated at a meeting of EU finance ministers that they would not support the second pillar of the global minimum tax regime (15% effective rate) until the US Senate's approval of the first pillar plans was in doubt, thus putting the global timetable for the new rules to come into force in all participating member states from January 2023 at risk.

At the time, the Finance Ministry also issued a statement saying that the Hungarian position is that the rapid application of the rules must not be at the expense of elaboration, that the taxation of digital companies must be addressed in line with the OECD agreement, and that the regulation must not increase taxes or put Hungarian companies at a competitive disadvantage.

There were speculations that the Polish and Hungarian governments were blocking the finalisation of the proposal because the European Commission had blocked agreements on the recovery fund. However, in May there were already reports that Brussels was coming to an agreement with Warsaw on the RRF programme and that this could push forward a deal on the minimum tax.

Cover photo: Erik Bánki, deputy leader of Fidesz, speaks before the agenda at the plenary session of the National Assembly on 17 May 2022. Source: MTI/Szilárd Koszticsák