Why Estonia and Hungary were so reluctant to accept the OECD minimum tax rate
Not all emerging European countries have welcomed the OECD’s global minimum tax rate of 15 percent.
The Organization for Economic Co-operation and Development (OECD) global minimum tax rate agreement has now been signed by 136 countries and jurisdictions, including all members of the European Union and much of the ‘Emerging Europe.
The agreement will allow countries to raise taxes on large multinational corporations operating in their territory and recommends the introduction of a global minimum corporate tax rate of 15% by 2023.
While they have now signed, two emerging European countries, Estonia and Hungary, were initially reluctant to do so, although conversations with economists from both countries reveal very different reasons behind their delay in signing. of the agreement.
Estonia’s unique approach
Estonian Business School economics professor Alari Purju said Estonia’s unique tax system prevented the country from agreeing to the deal at an earlier stage of negotiations.
âEstonia currently has a corporate tax regime which provides for a corporate tax of 20% on distributed profits (dividends) and 0% on retained earnings,â Purju said. Emerging europe. âIf we assume that 50% of corporate profits are distributed to shareholders (and this is approximately the case in Estonia), the effective corporate tax rate is 10%.
The economist further points out that this approach to taxation is often seen as one of the main reasons for Estonia’s success.
âThe interpretation of the tax authorities has been that the taxation of corporate profits is deferred until such profits are distributed to shareholders and retained (reinvested) profits are not taxed. Foreign direct investment (FDI) has played an important role in the economic growth of Estonia and such a system is considered favorable for FDI inflows into the country, âPurju said.
âEstonia viewed its own deal as more business-friendly,â he said, offering an explanation for the country’s opposition to the progressive nature of the OECD deal.
Krasten Staehr, professor of macroeconomics at Tallinn University of Technology, also points to a general reluctance within the Baltic country to abandon what has so far been a very successful tax model, but also recognizes the need for the Estonia to maintain its image as a reliable member state of the EU and the OECD.
“As a member of the EU and the OECD, Estonia must eventually follow the lead of the big countries in order to avoid unnecessary conflicts that it cannot win,” said Staehr. Emerging europe.
The macroeconomist further suggests that “Estonia may be able to maintain its corporate tax system while respecting the global minimum corporate tax rate of 15%.”
Indeed, Purju is somewhat optimistic about the country’s ability to adapt to the requirements of the new agreement, noting that, “as the OECD agreement is only for companies with an annual turnover of 750 million euros and more, the agreed minimum level of corporate tax will apply to large companies, which are mainly subsidiaries or branches of large international companies.
âSmall business taxation could follow the old regime. Such a solution has been agreed with the OECD and has been well received by the Estonian business community, âhe explains.
A pro-business populist
GÃ¡bor Scheiring, a Hungarian economist based at Bocconi University, Italy, and former member of the Hungarian Parliament (2010-14), says Hungary has favored low levels of taxation since Viktor OrbÃ¡n became prime minister for the second time in 2010.
“OrbÃ¡n is a champion of the race to the bottom of corporate taxation and has also fought EU efforts to harmonize the tax base,” Scheiring said. Emerging europe.
Despite OrbÃ¡n’s obvious favoritism towards big business, Scheiring maintains that his government has managed to present itself as anti-establishment.
âHe caused a stir by taxing banks when he was re-elected in 2010, but those special bank taxes have now been largely removed. Yet with that, he managed to create the impression that he is a maverick ready to oppose big business, âhe explains.
âIn reality, the OrbÃ¡n regime offers a very friendly environment for large companies, including Europe’s lowest corporate tax rate, currently at nine percent. Unemployment benefits in Hungary today only last three months. The current government is also very hostile to unions and has incorporated all the major demands of large companies – both national and international – into the labor code, which is now very liberal and offers very little protection, âcontinues Scheiring.
Meanwhile, the financial benefits of maintaining the presence of large companies in Hungary reinforced the government’s reluctance to sign the new tax deal.
“OrbÃ¡n is particularly friendly with manufacturing companies, such as German automakers, which benefit greatly from Hungary’s favorable tax and labor policies.”
The economist argues that the reluctance of OrbÃ¡n’s government to abide by the new OECD agreement has the same source as the government’s growing break with the EU over issues such as democracy and Right wing state.
âHungary’s economy depends a lot on the performance of these export-oriented manufacturing giants. This is why OrbÃ¡n is a pro-business populist – what I have called in my research the national-populist mutation of neoliberalism, âsays Scheiring.
According to the OECD, seven emerging European and Central Asian countries have yet to adhere to the new tax rate: Azerbaijan, Kosovo, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan.
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