U.S. threatens Hungary tax treaty over Pillar 2

 

The U.S. Treasury Department took the unusual step of providing notice to Hungary that it will terminate the U.S.-Hungary income tax treaty that has been in operation since 1979. The move comes in response to Hungary objecting to the implementation of the Organisation for Economic Cooperation and Development’s (OECD) Pillar 2 global minimum tax.

 

Pillar 2 generally seeks to impose a 15% minimum tax on the earnings of most multinational groups with revenues of at least 750 million euros. By deploying two interlocking rules under Pillar 2—the income inclusion rule (IIR) and the undertaxed payment rule (UTPR)—income taxed at less than 15% would be targeted for additional taxation.

 

Last month, the UK government stated that implementation of Pillar 2 in the UK will be delayed until calendar year 2024, as stakeholders were concerned that there was not sufficient lead time for implementation. Subsequently, the Council of the European Union (“The Council”) held an Economic and Financial Affairs Council meeting to address the draft European Directive on Pillar 2 and aiming to implement the provisions for fiscal years starting on or after Dec. 31, 2023. Hungary objected to the adoption at the meeting, however, effectively stalling the measure in the EU, as all member states of The Council must approve the directive for the text to be adopted. Previously, Poland objected to Pillar 2 implementation in the EU, though these problems now appear resolved.

 

Several press reports indicated that Republicans in the U.S. lobbied Hungary to object to Pillar 2 implementation. Following Hungary’s objection, Treasury gave notice that it will be terminating the longstanding U.S.-Hungary income tax treaty, seeking to increase pressure on Hungary to move Pillar 2 forward in the EU.

 

Hungarian Foreign Minister Péter Szijjártó recently discussed the developments, stating, “Despite the pressure on us, [Hungary] does not support the EU-wide introduction of a global minimum tax. We cannot jeopardize [Hungarian] firms and [Hungarian] jobs.”

 

There is also uncertainty on Pillar 2 in the U.S., as implementation remains stalled due to difficulties facing President Joe Biden’s Build Back Better (BBB) reconciliation bill. Negotiations on a slimmed-down reconciliation bill—which could still include the Pillar 2 provisions from the BBB—are still largely in the hands of Senate Majority Leader Chuck Schumer, D-N.Y., and key reconciliation holdout Sen. Joe Manchin, D-W.V. While Schumer has been doggedly negotiating with Manchin to salvage key pieces of the BBB agenda in a smaller version that Manchin could accept, concerns over rising inflation threaten the potential for ultimate enactment of a reconciliation bill with a broader tax title.

 

Applicable multinational enterprises should continue to monitor OECD Pillar 2 communication and developments domestically and abroad as further information on implementation in both the EU and the U.S. is expected in the coming months.

 

 

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