The Biden administration recently made an announcement that they wish to implement a global 21% corporate tax. The reasoning behind it is that multinational companies have been increasingly taking advantage of tax haven countries around the world to avoid paying taxes, resulting in massive losses in tax revenue. Another goal is to prevent a race-to-the-bottom in corporate tax rates, where countries keep undercutting each other in order to remain competitive. Hungary, with its 9% corporate tax, the lowest in the European Union and the 4th lowest in the world, has much to lose from a high global corporate tax rate.
The basic idea is that countries would be able to punitively tax companies that take advantage of tax havens. If a company operates in country A while paying taxes in country B, and the corporate tax in country B is below the global minimum, then country A can tax the company for the difference. Using a real-world example, a German car manufacturer operating in Hungary would pay 9% corporate tax in Hungary, and then an additional 12% tax in Germany to bring the total in line with the global corporate tax rate. This obviously negates the competitive advantage of having a lower corporate tax rate, and it even creates an opportunity cost through the loss of revenue to other countries.
While on the surface this may seem fair, as there are certain countries, often very small ones, that exploit low corporate taxes to draw in foreign companies that would otherwise ignore them, it is discriminatory towards many others.
Hungary is not a tax haven; it does not host a multitude of multinational headquarters who use it to avoid paying taxes. Hungary is using a low corporate tax rate, combined with many other economic incentives, to bring in large amounts of foreign capital investment.
But you might be thinking, how is this any different from being a tax haven? These investments are very different from simply relocating a company HQ to save money, they are massive investments worth millions of euros that lead to the construction of factories, R&D centers, and business parks. The companies that come to Hungary do so to take advantage of well-trained and relatively cheap labour, as well as the favourable conditions for developing manufacturing capacities.
Redefining Hungary as a good country for large-scale investments has been a priority of the Hungarian government for many years. It is just as important to provide a good, predictable regulatory environment, comparative advantage, educated labour pool, etc., as it is to have a low corporate tax. At the end of the day,
the goal of Hungary’s corporate tax regime is not enable companies to avoid paying taxes on their manufacturing abroad, it is part of a larger pro-business strategy to increase manufacturing and industry within Hungary itself.
While it is admirable that the United States wants companies operating within its borders to pay their fair share of taxes, it is quite hypocritical that it wants to punish other countries for being competitive when the domestic U.S. tax system is about as full of holes as a block of Swiss cheese. Many post-communist states structured their entire economies around Western investment (which was often extremely predatory and destructive), this is one of the reasons why many Eastern European countries have a lower corporate tax rate than the United States.
So far, the U.S. has mostly found support for the idea from its historical allies in the West, all of whom have a longstanding relationship with wealth and capital. It remains to be seen how exactly Eastern Europe will react to this development, but it may be a good issue on which the countries of Eastern Europe, more specifically the V4, can defend their common economic interests. The failure of the United States to prevent its companies from moving abroad, as well as its failure to properly tax corporations in general, should not be offset by taxing a score of countries that only recently achieved a somewhat-Western standard of living through adapting to capitalism and Western investment.
Here is a chance for the Hungarian government to illustrate its successful economic policy, to show how low corporate taxes are not exclusive to tax havens and can instead be used to incentivize large scale physical capital investments. It remains to be seen whether the idea of a global corporate tax rate will find enough international support to become a reality, but the massive debt that the developed world has accumulated due to Covid-19 may provide the necessary impetus for the project.
Featured photo illustration by Sándor Ujvári/MTI