Termination of tax treaty damaging competitiveness, U.S.-HUN relations

Inside View

Károly Radnai

The Budapest Business Journal asked some of Hungary's foremost experts about the possible economic effects of the termination of the U.S.-Hungary double taxation agreement. In this article, Károly Radnai, partner at Andersen in Hungary talks about the ramifications of the treaty's termination.

The tax agreement is considered to be the cornerstone of the strong economic ties with the United States since 1979, defining mutually accepted tax rules for bilateral transactions thereby enabling streamlined operation of U.S. and Hungarian companies. The decision to terminate the convention creates uncertainty and unfavorable conditions for investors in both countries, deteriorates the competitiveness of Hungarian companies, and damages the bilateral relationship between the United States and Hungary.

Tax treaties allocate the primary taxation right between the contracting states with respect to incomes realized on international transactions. They also provide methods for the elimination of double taxation and a mutual agreement procedure to avoid disputes between the parties. Following the termination of the treaty, the tax effects of U.S.-HU transactions will have to be established according to the domestic laws of both former contracting states parallelly. Fortunately, the U.S. and Hungarian national laws both provide relief from double taxation, usually by granting a tax credit with respect to taxes levied by the other state. Thus, the termination of the treaty would not immediately result in double taxation. However, from then onwards, both countries would be free to change their domestic legislation with respect to the taxation of foreign-sourced incomes, which can deprive investors of long-term predictability.

In addition, fees for services provided by companies established in Hungary to U.S. partners would be subject to withholding tax in the United States, which would deteriorate the competitiveness of Hungarian firms, and the Hungarian economy.

Hungary’s tax treaty with the United States is considered to be one of the country's most beneficial agreements. Therefore, keeping the current agreement in force and/or negotiating a new agreement would be the fundamental interest of all U.S businesses with Hungarian interests and Hungarian businesses with U.S. interests. By terminating the treaty, Hungary would be the sole country in the EU and among OECD member states that does not have a tax agreement with the United States. Although it is not easy to predict the effect of the worst-case scenario at the moment, geopolitically it can be perceived as terribly harmful.

The U.S. Treasury Department announcement regarding the termination of the agreement is believed to be induced by Hungary’s hold-out against the introduction of the 15% global minimum tax. However, the adoption of the global minimum tax rules would jeopardize the competitiveness of Hungarian companies less than the termination of the tax treaty. With Hungary resisting to implement the global minimum tax, it loses the possibility of collecting the top-up tax, which will definitely be collected elsewhere. It may also carry the risk that Hungary loses the favorable results in connection with the global minimum tax rules having been successfully negotiated so far.

So the message is that the leaders of the two countries should do everything in their power to keep the current agreement in force and/or to conclude a new agreement in order to maintain the advantageous and predictable conditions to protect and promote investment in both countries.

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