The OECD’s historic proposal for a worldwide tax-regulation system adapted to the digital age was accepted by the members in October 2021 and is expected to come into force in January 2023. The proposal rests on two pillars: putting an end to the widespread tax-evasion of big tech companies by forcing them to pay a fair amount of taxes where their actual profit is created, and secondly, introducing a 15 per cent global minimum tax on multinational corporations with a profit higher than €750 million (with the idea of the surplus tax-revenue being redistributed equally among the countries they operate in), in order to end the downward spiral of negative tax competition and finally address the problem of the offshore tax havens. In theory, such legislation benefits every country since it makes some of the biggest corporations–with profits equal to smaller countries’ entire GDP–finally start pulling their weight, while also reimbursing those countries losing investment opportunities by redistributing the excess revenues. Theoretically.
Back in 2021, Hungary was among those who signed up on the OECD proposal, even if a bit reluctantly. The main problem with the legislation was the same as it is now: raising the corporate tax from the current 9 per cent to 15 per cent would discourage many international investors from choosing Central Europe, as the low tax rate was the main incentive that played a key role in driving economic growth. Yet, without many details specified at that time, and expecting a highly optimistic pandemic recovery, Hungary was on board because of the long-term benefits and to protect the regional cohesion of the bloc. Now, when the time has come for implementing the regulation in Europe on the basis of a later EU directive, Hungary announced its veto. Some interpret this move as backtracking on a former promise and putting unnecessary obstacles in the way of others, but in fact, the reality is much, much simpler. Hungary has made a commitment to more equality, not less. Sadly, if the directive is implemented in its current form amidst this unprecedented financial crisis, it will only cater to the core European states and countries across the Atlantic, while disproportionately hurting those on the periphery of the EU.
Hungary has made a commitment to more equality, not less
Thus, before going any further with such comprehensive legislation, there are several issues that need to be addressed first. Problems that make a global minimum tax a caricature of what it was set out to achieve. For instance, countries create a competitive environment for corporations not only by outbidding each other with ever lower taxes, but also by looser environmental regulations and by setting the minimum wage low to provide an affordable workforce. Taking out the tax component will only make poorer countries focus on the other two factors, at the expense of workers and the environment. For those EU countries where certain standards concerning the protection of employees and the environment are already in place, this would only mean losing their competitive edge. Secondly, Central European countries would be the most negatively affected as they would lose investors both to non-members and the developed core countries. Tax incentives are the most valuable drivers of our economic growth: without them we’ll have no chance of reaching the economic level of Western Europe and being able to compete in other ways, such as primary market share or infrastructure.
Thirdly, while promises of reallocation sound good on paper, details of the scheme reveal a far less appealing picture. In its current form, only twenty per cent of the surplus tax would be redistributed among the countries that give a home to subsidiaries of the same companies, and the rest will be kept wherever most of their profit was made. This is not nearly enough for Central Europe to keep pace with the West, especially in times of crises such as this one.
The most notorious offshore tax havens are not included
Finally, we might also want to discuss something that raises concerns not specifically about the future economic imbalance of the participating countries, but questions the very purpose of the whole proposal. As mentioned above, one of the main reasons the OECD and its partner countries accepted this plan was to put an end to offshore tax evasion. This is why we’re talking about a global initiative, isn’t it? Well, while the list of signatories (with 134 members) is indeed quite impressive, it is far from being complete, and many of the most notorious offshore tax havens are simply not included. Such places as Cyprus, Vanuatu, Fiji or Salvador are among the most obvious examples, but we can also mention some directly under the US’ sphere of interest, such as Palau, Guam, American Samoa or the Marshall Islands. Therefore, without further regulations, the unethical practice of offshore balancing will only get more problematic if the directive goes forward, and mainly at the expense of the less prosperous who only want to play by the rules.
Thus, no matter how hard the US is trying to blackmail Hungary right now into getting aboard this crooked train, the global minimum tax is simply unacceptable under the current circumstances. With unprecedented levels of inflation as well as extended energy and food security crises upon us, now it is not the time to roll the dice in such a high stakes game, especially when the EU is still holding back the pandemic recovery funds. If the West truly wants more equality, it better starts making sure the benefits of new tax regulations apply to everyone. No one cares for smiling hypocrites when the world is burning.