2nd Jun 2023

Hungary and Estonia blocking EU tax reform

  • EU economy commissioner Paolo Gentiloni accused Hungary and Estonia of blocking the proposal for new tax rules (Photo: European Commission)
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Hungary and Estonian diplomats have blocked a revised set of EU tax rules - potentially derailing an effort to curb the race for ever-lower corporate taxes in the EU.

The current rules were drafted in 1997 and have since then not been adjusted to a new 21st century reality.

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International tax competition has become globalised and much more widespread compared with the late 1990s when lawmakers first drafted the rules, which have led EU countries to miss out on €160bn in tax income annually, according to the Organization for Economic Cooperation and Development (OECD).

But reform has proven elusive. Debates by the Code of Conduct Group - the EU body responsible for enforcing the tax laws - have been held behind closed doors, without taking notes, making it hard for lawmakers to access information or keep track of progress.

After years of deliberation, member states have now put a new ruleset on the table, which a political advisor - who asked to remain anonymous - described to EUobserver as "unambitious, but at least a step forward."

But when the committee of member state ambassadors (so-called Coreper I) discussed the updated ruleset, they failed to agree.

On Tuesday, EU ministers of finance will vote on the proposal.

But chances for a breakthrough are low, with EU commissioner for economy Paolo Gentiloni publicly telling MEPs last week that Hungary and Estonia are the ones blocking the new rules - officially known as the Code of Conduct for Taxation.

"If the vote fails, it shows how unanimous decision-making does not work," noted the political adviser.

Because the debates are held behind closed doors, what may have motivated Hungary and Estonia to block the new rules is unclear.

But in parallel negotiations, Hungary and Estonia have also opposed a proposal for a global minimum tax.

The OECD, the US and the EU want to implement a global minimum tax rate of 15 percent.

In the EU, this proposal will come up for a vote on 22 December.

But Estonia and Hungary want to delay implementation. "Blocking the Code of Conduct may be a way of improving their negotiating position in the vote for a minimum tax," according to Chiara Putatouro, tax policy advisor at Oxfam international.

Secrecy and evasion

Martijn Nouwen, an assistant law professor at the University of Leiden, recently uncovered and analysed 2,500 confidential documents from the Code of Conduct group, not only showing the non-transparent nature of the EU body tasked with enforcing tax rules, but also their ineffectiveness.

The Code of Conduct rules have failed to prevent tax evasion, and member states have proven to be lax in enforcing the rules, according to Nouwen.

In an interview with the German weekly Der Spiegel, he added that the new rules - even if member states reach an agreement on Tuesday - will not solve the most important problems, leaving open the most-used accounting tricks.

The new rules provide some rules on transparency but will only make public documents "if appropriate."

But companies will still be able to evade national laws by setting up letterbox companies in low tax countries, and, most importantly: the rules will only apply to countries, not people - while a lot of the competition between countries is aimed at attracting high-net worth individuals.

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Hungary: why we can't support a global minimum tax

This month the OECD Inclusive Framework agreed on the main building blocks of new tax legislation for a global minimum tax and for the digital economy. However, Hungary did not join - this is why.

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