It has been widely reported that the U.S. Treasury Department (Treasury) is planning to terminate the U.S.-Hungary tax treaty and is preparing to initiate a formal process to terminate the treaty.1 The treaty has been in effect since 1979 and at the time of signature, both countries had proportionate corporate tax rates, and Hungary levied withholding taxes on cross-border dividends, interest, and royalty payments.2 However, Hungary has slashed its corporate tax rate from 50 percent to 9 percent and did away with withholding taxes on cross-border payments to nonresidents.
Treasury has been discussing the disproportionate corporate tax rates with Hungary, and after an analysis showed that the treaty conferred benefits only to Hungary, purportedly decided to terminate the treaty. Treasury has yet to make an official statement and the exact timing of the termination is unknown.
Treasury’s decision to terminate the treaty seems to come after Hungary’s opposition to a global corporate tax overhaul. The European Union (EU) has been trying to unanimously implement global minimum corporate tax rules, known as Pillar 2 of the OECD’s Pillar Two Model Rules.3 Pillar 2 seeks to ensure that large multinational companies pay an effective tax rate of 15 percent in the countries in which they operate. All EU member states except Poland had agreed to adopt Pillar 2 in May. However, as reported, the Hungarian parliament adopted a resolution on June 21 to reject the new Pillar 2 rules. All EU tax directives require unanimity among EU member states for implementation. While Poland has ultimately agreed to adopt Pillar 2, Hungary’s opposition effectively blocks the directive from being implemented.
