Hungary has slashed its corporate tax rate to just 9 percent, the lowest in the European Union. The move pushes the country’s rate even lower than that of Ireland’s, which is set at 12.5 percent. Currently, the country taxes businesses that make over 500m forints ($1.74 million) at 10 percent, while businesses that make over that amount are taxed at 19 percent. The new 9 percent tax rate, which will kick in in January, will apply uniformly to all businesses no matter their size or earnings.
The move is part of Prime Minister Viktor Orban’s efforts to attract increased foreign direct investment. Orban is up for re-election in 2018, and he hopes to drive up economic growth from this year’s estimated rate of 2.1 percent — the lowest rate since 2013. His administration hopes that by cutting the corporate tax rate, Hungary will be a more lucrative destination for businesses and corporations.
Although the new tax rate might seem like a pretty dramatic change, it actually may not be as significant as it appears to be. That’s because tax rates for major foreign multinationals operating in Hungary, such as German automakers, are already heavily discounted thanks to significant subsidies and tax concessions. Many of these firms already enjoy a tax rate close to 10 percent after these subsidies, so the change won’t have much of a material impact.
Furthermore, it is unclear to what extent the strategy will be successful in sparking increased investment in the country. “It could have an effect on tax optimization rather than actual business activity, despite European efforts to combat this,” Gabor Bekes, a senior research fellow at Hungary’s Institute of Economics, told the FT last week. “It is hard to predict how much additional tax payments they can attract into the country with this measure, but it may be coupled with very little change in business activity.”
In conjunction with reducing corporate tax, the right-winged Orban also plans to cut the payroll tax. The hope is that this will not only encourage investment, but will also encourage businesses to boost salaries in order to combat the country’s labor exodus, which sees many young people leaving to find higher-paid work in other countries. The government is also pushing for a 15 percent increase in a minimum wage to help secure higher salaries for citizens.
This new corporate tax rate will lower revenue by 145 billion forints each year ($497 million). However, the government hopes that accelerated economic growth will allow it to compensate for this shortfall, ensuring that the deficit doesn’t grow.
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