Tuesday, July 19, 2022

US to End Tax Treaty With Hungary

The Treasury Department has begun dismantling the United States' tax treaty with Hungary, 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.

In a statement July 8, the department cited Hungary's lowering 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." 

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 nearly halved its corporate tax rate to 9.9%, lowest in the EU, from 19% in 2010. 

Not stated it that the U.S. Treasury Department believes that the Existing Treaty has been exploited, (No Limitations on Benefit Provision, in the Hungary Treaty) particularly in the case of interest, by Hungarian finance corporations ultimately owned by persons from third countries that either are not covered by an income tax treaty with the U.S. or covered by a treaty that did not eliminate source-country withholding tax on interest. 

According to a 2007 study by the U.S. Treasury Department, data compiled from U.S. corporate tax returns indicate that total interest payments from foreign-controlled U.S. corporations to related parties in Hungary had surged from 1996 through 2004.

Why This Matters

Treaty benefits enjoyed by individual taxpayers would no longer be available if the treaty is terminated.  As a result, benefits of lower tax rates on certain income (e.g., interest, dividends), exclusion for certain employment income, as well as relief from double taxation would expire with the termination. This could give rise to double taxation without relief for individual taxpayers and higher international assignment costs for mobility programs. 

Effective Date of Termination 

Article 26 of the Tax Treaty provides for a six-month advance notice for termination. After the notice, which occurred in July of 2022, withholding taxes apply to amounts paid or credited on or after the first day of the next January following the expiration of the six-month period. Accordingly, payments made on or after January 1, 2024 will be subject to 30% withholding.

Have an IRS Tax Problem? 

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