Hungary opts out of EU competitiveness pact

Hungary is to opt out of the proposed EU competitiveness pact because of its opposition to the proposed adoption of a common consolidated corporate tax base.

Euro-zone leaders agreed the competitiveness pact to increase market confidence as they seek to end the euro debt crisis. EU member states outside the euro-zone, such as Hungary, are allowed to opt out of the pact. The common consolidated corporate tax base is an important, but controversial part of this pact.

In addition to unifying the rules of calculating the corporate income tax base, the proposed Directive on the common consolidated corporate tax base would allow cross-border consolidation of profits and losses and eliminate the need to apply transfer pricing legislation for intra-group transactions within the EU. Corporate tax rates would remain in the competence of each Member State and thus rest unharmonised.

Hungary’s Prime Minister has said that, from a strategic point of view, he did not support the proposal for member states to adopt a common consolidated corporate tax base.

However, he expressed support for the other main objectives of the pact, as they are consistent with Hungary’s recently announced budgetary reforms. These are: enhancing competitiveness, boosting employment, improving the sustainability of public finances and strengthening financial stability.

The Ministry of National Economics has said that the pact does not fit into Hungary’s corporate tax policy. According to its calculations, the proposed common consolidated corporate tax base would cause a drop in Hungary’s corporate income tax revenues, end the tax system’s flexibility and jeopardise revenues from the local business tax.

Even Brussels estimates that this step would reduce Hungary’s GDP by 0.2-0.9 percentage points. This seems largely due to the proposed apportionment formula for distributing the consolidated tax base among the countries in which the corporate group has its subsidiaries. This does not seem to favour CEE countries, due to its heavy reliance on sales revenues and salary-related expenses.