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Europe’s new awkward squad casts shadow over global tax deal

Europe’s new awkward squad casts shadow over global tax deal

3 min. 02.07.2021 From our online archive
Hungary, Ireland and Estonia challenge proposals for minimum international rate, agreed by 130 countries at OECD
Hungarian Prime Minister Viktor Orban called the global agreement "absurd"
Hungarian Prime Minister Viktor Orban called the global agreement "absurd"
Photo credit: AFP

An unlikely group of European Union countries from far-flung corners of the bloc accounting for just 4% of its output is resisting worldwide consensus on a revamp of corporate tax.

Hungary, Estonia and Ireland are challenging proposals for a global minimum rate in its current form, casting a shadow over what appeared to be a breakthrough moment on Thursday in OECD talks over harmonising company levies.

The opposition of three countries in an unusual combination that accounts for just 3.6% of the EU population is significant because a unanimous decision there may be needed to craft a legal directive for the world’s largest trading bloc to adopt the initiative.

That plan, backed on Thursday by 130 countries and jurisdictions, would set a minimum tax rate of at least 15% and establish a new regime for sharing revenues gleaned from the profits of multinational firms. The dissent underscores how more time and flexibility may be needed to convince global holdouts just as the discussion shifts to the Group of 20.

US Treasury Secretary Janet Yellen called the talks hosted by the Paris-based Organisation for Economic Cooperation and Development “an historic day for economic diplomacy,” an assessment that wasn’t shared by her Hungarian colleague.

Rate is 'too high'

“The global minimum tax would obstruct economic growth, the planned 15% tax rate is too high and it shouldn’t be levied on real economic activity,” Hungarian Finance Minister Mihaly Varga said in a statement on Friday. Hungary is ready to continue “constructive” talks with OECD partners to reach an “appropriate agreement,” he said.

His Irish counterpart Paschal Donohoe kept up dissent to the deal in a Newstalk radio interview on Friday.

“This is a matter of national sensitivity to Ireland and there wasn’t enough clarity and enough recognition of a key issue for us in the text that was presented to me,” he said, adding a note of optimism that he believes “there will be an agreement later on this year that will then be implemented by the European Union.”

In Estonia meanwhile, the finance ministry issued a statement saying that the country was “not yet ready to fully endorse” proposals for a global minimum tax.

The tax overhaul is aimed at helping countries share the spoils from multinational firms like Facebook and Google, with implementation targeted for 2023. The rules would curtail tax avoidance by making global enterprises pay an effective rate of “at least 15%” and give smaller countries more tax revenue from foreign firms. Several key countries agreed to the terms, including India, China and Turkey, the OECD said.

Potential obstacles in US Congress

Hungarian Prime Minister Viktor Orban, who has slashed corporate tax rates to 9% as part of tax cuts, has called the plan “absurd.” He credits his policies with drawing foreign investments, including carmakers such as BMW and some of the biggest battery plants in Europe.

Such corporate spending has helped the economy outperform and sustain Orban during clashes with EU over the alleged erosion of the rule of law, most recently over a crackdown over LGBTQ rights.

There are plenty of other risks to the global tax deal. Questions over how and when some countries’ unilateral taxes on tech firms’ revenue will be rolled back remain unresolved.

The US Congress could also prove a major obstacle, since the legislature’s approval would be required to formalise Washington’s participation in the system. President Joe Biden’s Democratic party holds razor-thin majorities that are at risk in next year’s midterm elections.

French Finance Minister Bruno Le Maire said he will spend the coming week before a G-20 meeting in Venice, Italy, redoubling his efforts to convince reluctant European countries to “make the necessary efforts to join an historic agreement that very broadly brings together the states of the planet.”

“Our goal now is to have a fair regulation in place by the time of the OECD meeting in October, one that’s in the interest of all states, independent of their size or economic development,” Hungarian Finance Minister Varga said.

©2021 Bloomberg L.P.

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