GOP lawmakers are working with Hungary’s government to scuttle an international tax deal backed by the Biden administration.
Their effort, if accomplished, could result in new high European corporate taxes on big tech companies like Amazon, Google and Facebook.
Those taxes, known as digital service taxes, would siphon money away from the powerful U.S. tech sector and into European public coffers, which could prompt the U.S. to put retaliatory tariffs in place against European companies and spark a trade war.
Digital service taxes (DSTs) were established because traditional methods of taxation — like taxing a location where a good is produced or where a company is headquartered — don’t make much sense in the context of software, which can be written and rewritten in many different places at once.
But since it’s a lot easier to track where software is being used, DSTs proliferated in the 2010s as a way to tax big tech companies based on the location of their customers.
The threat of tit-for-tat trade spats as a result of DSTs led almost 140 countries to agree “to stop the proliferation of ‘Digital Services Taxes’ and other relevant similar measures” by replacing them with “a consensus-based reallocation of taxing rights,” according to a 2021 joint statement from several of those countries, including the U.S. The agreement was part of a framework from the Organization for Economic Co-operation and Development (OECD) and the Group of 20.
The Treasury Department’s determination to get this deal done has left Republicans feeling excluded from the process, which they’ve characterized as a “go-it-alone approach” that disregards their constituencies.
In protest, GOP lawmakers aligned with politicians in Hungary, which regards the 15 percent minimum corporate tax deal as a threat to its own low corporate tax rates.
In June, Hungary blocked the adoption of the 15 percent minimum tax rate in the European Union, effectively slow-tracking the deal. This prompted the Biden administration to nix its bilateral tax treaty with the central European nation.
The move by the administration could disincentivize investment in Hungary and lead to double taxation for companies operating there.
The action also drew ire from Republicans.
“Treasury’s latest tactic to force implementation of the OECD agreement is to withdraw from a longstanding bilateral tax treaty approved by Congress,” Senate Finance Committee ranking member Sen. Mike Crapo (R-Idaho), House Ways and Means Committee ranking member Rep. Kevin Brady (R-Texas) and Senate Foreign Relations Committee ranking member Sen. James Risch (R-Idaho) said in a statement earlier this month.
“This is a transparent attempt to bully Hungary into hasty action on a global minimum tax and interfere in an internal European Union policy-making process,” they said.
Democrats have been quick to portray the Republican-Hungarian tax policy alliance as unholy and slammed Hungary as an atypically authoritarian European nation, characterizing Prime Minister Viktor Orbán as an autocrat.
Senate Majority Leader Charles Schumer (D-N.Y.) called out the Conservative Political Action Conference in May for holding a meeting in Hungary and hosting Orbán as their keynote speaker.
“MAGA Republicans are showing Americans exactly who they are: just this weekend, the Conservative Political Action Conference — the largest conservative organization in America — held their conference in Hungary and welcomed one of Europe’s most notorious proponents of replacement theory, Viktor Orbán, as their keynote speaker,” Schumer said, referring to a racist ideology held by the perpetrator of a mass shooting who targeted Black Americans in Buffalo, N.Y., earlier this year.
“Again, the Conservative Political Action Conference — a very important organization in the new Republican MAGA Party — had Viktor Orbán as their keynote speaker, an autocrat who has whittled away democracy in Hungary,” he said.
Hungary has said political differences between it and the U.S. don’t make much difference to the businesses enjoying the country’s low tax rates.
“While there may be hand-wringing in the Oval Office about what some view as the erosion of democratic freedoms in Hungary, corporate boardrooms seem not to have such misgivings, as they continue to pour dollars into the conservative-led country,” an article posted to the website of the Hungarian Embassy in Washington reads.
Following the cancellation of the U.S.-Hungary tax treaty, a Hungarian delegation led by Foreign Minister Péter Szijjártó met with Republican lawmakers in Washington last week.
“An entire line of congressmen and senators stood by Hungary when the Democratic administration suspended the bilateral tax agreement in revenge for our veto against the global minimum tax,” Szijjártó posted to his Facebook page on July 20 after the meeting.
“Just as we in Hungary [and] the Republicans here in America oppose the increase in taxes, we also oppose the introduction of a global minimum tax. Today we confirmed the professional cooperation between the Republican Party and the Hungarian government,” Szijjártó wrote.
Analysts say that there are EU mechanisms that could allow the global minimum tax to pass without the help of Hungary. However, they caution that failure for Hungary to agree could still renew interest in the digital service taxes so feared by U.S. tech giants.
“If all this international stuff stalls, some of those countries can come back and say, ‘Well, you know what? We’re tired of waiting for this international harmonic convergence thing to happen, so we’re just going to go back to our digital services taxes.’ If they do that, that’s really, really going to piss off a lot of these big American tech companies,” Howard Gleckman, an analyst with the Tax Policy Center, said in an interview, mentioning “companies like Alphabet and Twitter.”
A 2021 estimate from Oxford University’s Centre for Business Taxation found that 64 percent of taxable profit — or $56 billion — would be generated by U.S. companies, as part of the agreement known as Pillar 1.
“They’re still calculating the tax liability that would be in place under a DST in France, for example, but they’re not charging that tax until they’ve determined that Pillar 1 has failed. Because of this agreement they’ve kind of held off,” Sean Bray, an EU policy analyst with the Tax Foundation, said in an interview.
“Technically, the DSTs are still the law of the land, but they’ve come to an agreement where they’re not actually processing that tax liability on the companies until Pillar 1 implementation is either decided — yes or no.”