Hungary has blocked an EU directive that would introduce a 15% minimum tax on large multinational corporations, arguing that the measure would undermine European competitiveness and put jobs at risk. The move has once again exposed one of the central tensions in international tax policy: the desire of governments to establish common rules for multinational taxation versus the desire of individual countries to retain the ability to compete through their own tax systems.

The immediate dispute concerns the implementation of the OECD’s global minimum tax agreement within the European Union. But the underlying issue is much broader. It concerns the future of international tax competition and whether governments should be able to use corporate taxation as a tool to attract investment, businesses and employment.

The Global Minimum Tax

The proposed 15% minimum tax emerged from the OECD/G20 negotiations over the international tax system. In October 2021, the OECD reported that more than 135 jurisdictions had joined the two-pillar framework designed to address the tax challenges arising from the digitalisation and globalisation of the economy.

US Attempts to Create a Global Tax Baseline was published in April 2021, when the proposal was still developing. The issue has now moved considerably further. The OECD’s Pillar Two framework is designed to ensure that large multinational enterprises pay a minimum level of tax on income arising in each jurisdiction in which they operate.

The Global Anti-Base Erosion, or GloBE, rules establish the framework for applying the 15% minimum effective tax rate. They are principally directed at multinational groups with consolidated annual revenues of at least €750 million. Where the effective tax rate in a jurisdiction falls below 15%, the rules are designed to create a top-up tax bringing the relevant income up to the agreed minimum level.

This is an important distinction.

The proposal does not mean that every company in every country will suddenly face a 15% corporate tax rate. Rather, it creates an international floor for large groups falling within the scope of the rules.

Why Hungary Objected

Hungary’s objection is understandable when viewed through the country’s economic model.

Hungary has traditionally used a relatively low corporate tax rate as one component of its strategy for attracting foreign investment and establishing itself as a competitive manufacturing and business location within the European Union. Its 9% corporate tax rate was, at the time, the lowest headline corporate income tax rate among EU member states.

A global minimum tax potentially reduces the value of that competitive advantage.

Hungarian officials argued that the timing was particularly problematic given the economic environment created by the war in Ukraine, rising inflation and the broader pressures facing European economies. Hungarian Finance Minister Mihály Varga told EU finance ministers that Hungary could not support the measure at that stage, while Foreign Minister Péter Szijjártó described the proposed tax as a “low blow” to European competitiveness and warned about the potential impact on employment.

The objection was therefore not simply about whether multinational corporations should pay more tax. It was about whether Hungary should retain the ability to determine how it competes for investment.

The OECD Agreement

The OECD agreement was the product of years of international negotiations over base erosion, profit shifting and the increasing ability of multinational businesses to allocate income across jurisdictions.

The COVID-19 crisis added urgency to those negotiations. Governments had accumulated substantial additional debt while attempting to support businesses and households through the pandemic, increasing the political pressure to identify sustainable sources of public revenue.

The OECD’s two-pillar framework was intended to respond to those pressures while addressing concerns that the existing international tax system was no longer well suited to a highly digitalised global economy.

The Pending Paradigm Shift examined the broader structural pressures facing Western economies, including high public debt and increasing pressure on tax systems. The global minimum tax is part of that wider movement toward greater international coordination of taxation.

At the time of the OECD agreement, the reform was presented as potentially generating more than €140 billion in additional annual revenues for governments. The political attraction is obvious: a coordinated minimum tax could increase revenues while reducing the incentive for multinational groups to shift profits toward jurisdictions offering very low effective tax rates.

But there is another side to the equation.

Tax competition exists for a reason.

The End of Tax Competition?

For decades, countries have competed for foreign direct investment through a combination of taxation, regulation, infrastructure, labour costs, political stability and access to markets.

Corporate taxation is only one element, but it can be an important one.

A multinational considering where to establish a manufacturing facility, headquarters, intellectual-property operation or regional office does not simply ask which country has the lowest tax rate. It considers the entire economic proposition. Nevertheless, a meaningful difference in corporate taxation can influence the economics of an investment decision.

This is why the global minimum tax matters.

If the largest multinational groups can no longer benefit fully from effective tax rates below 15%, countries will have to rely more heavily on other aspects of their economic proposition.

That does not necessarily mean the end of tax competition.

It may mean the beginning of a different form of tax competition.

Wealthy Beware argued that international investors increasingly need to consider investment migration and jurisdictional diversification as responses to changing tax and political environments. The same principle applies to multinational businesses: jurisdictional strategy cannot be reduced to a single tax rate.

Hungary’s Strategic Position

Hungary’s position is particularly interesting because its corporate tax strategy has been part of a broader effort to establish itself as an investment destination.

The country has attracted significant foreign manufacturing and industrial investment, particularly from European and Asian companies. Its relatively low corporate tax rate is one part of that proposition.

From Hungary’s perspective, replacing a 9% headline corporate tax environment with an international minimum of 15% could weaken one of the tools available to policymakers.

That is precisely why the dispute is more important than the percentage might suggest.

If every EU country were required to operate within the same minimum tax framework, individual governments would have less freedom to compete through corporate taxation. They would instead have to compete through infrastructure, labour, regulation, investment incentives, access to markets and the broader ease of doing business.

That may ultimately be beneficial for Europe.

But it also represents a significant transfer of policy flexibility away from individual member states and toward a coordinated international framework.

Why Unanimity Matters

There is another reason Hungary’s objection is significant.

Tax policy within the European Union is an area where unanimity has traditionally played an important role. The proposed OECD rules therefore require implementation through an EU directive, and agreement requires all member states to support the measure.

That gives a single country considerable leverage.

Hungary’s objection was consequently enough to prevent the EU from reaching agreement at the June 17 meeting of finance ministers, despite the fact that the underlying OECD framework had already secured broad international support.

This illustrates a fundamental weakness, or perhaps a deliberate feature, of European tax policymaking.

The EU can create common rules in many areas through qualified majority voting. Taxation is different.

Individual states retain significant sovereignty over fiscal policy, and that sovereignty can make harmonisation considerably more difficult.

The Broader Question of Tax Sovereignty

The dispute also raises a philosophical question.

How much control should individual countries retain over their own tax systems?

From one perspective, the global minimum tax is a logical response to globalisation. If multinational businesses operate across borders, governments argue, tax rules must also operate across borders. Otherwise, individual countries can find themselves competing against one another in ways that progressively reduce effective corporate taxation.

From another perspective, tax competition can be economically productive.

A country with a smaller domestic market or fewer natural advantages may have little choice but to offer investors something attractive. Lower taxation can be one mechanism for compensating for other disadvantages.

For the 99.5% Act and US Taxes Set to Rise examined the increasing political pressure for higher taxation and the potential consequences for investment and wealth preservation. The global minimum tax represents the corporate counterpart to that broader trend.

The question is whether international tax coordination ultimately produces a more stable system or simply removes one of the competitive tools available to smaller jurisdictions.

What Does It Mean for Investors?

For investors, the consequences are not limited to multinational corporations.

A global minimum tax can change the relative attractiveness of jurisdictions even where the investor’s own company is not directly subject to the rules.

If large multinational groups face a more uniform international tax environment, other factors become more important in determining where capital is deployed.

Legal certainty matters.

Infrastructure matters.

Access to markets matters.

The availability of skilled labour matters.

Financial and professional services matter.

Political stability matters.

And, increasingly, the predictability of the tax system itself matters.

For international investors, the lesson is that tax cannot be considered in isolation from the broader jurisdictional proposition.

A jurisdiction offering a low tax rate but weak infrastructure, regulatory uncertainty or limited access to markets may not necessarily be more attractive than one with a higher tax rate and a significantly stronger economic environment.

The Implications for Smaller European Economies

This is particularly relevant for smaller European economies such as Cyprus and Malta.

Their international investment models have historically relied, at least in part, on competitive taxation combined with access to the European market, professional services, financial infrastructure and a relatively business-friendly environment.

The global minimum tax potentially weakens the importance of the first element for the largest multinational groups.

It does not eliminate the importance of the others.

Indeed, it could make them more important.

If countries can no longer compete primarily through very low corporate tax rates, they must compete through the quality of the overall environment they offer investors and businesses.

That may ultimately produce a more sophisticated form of competition across Europe.

The Real Issue Is What Comes Next

The OECD agreement represents an important shift in the international tax landscape, but it does not amount to complete global tax harmonisation.

Countries will continue to have different tax systems. They will continue to use different incentives. They will continue to compete for foreign investment.

The difference is that the largest multinational groups are increasingly being placed within a common international framework.

The real question is therefore not whether tax competition disappears.

It is how tax competition evolves.

Countries that have relied heavily on low corporate tax rates may need to develop broader economic propositions. Countries with strong infrastructure, skilled labour, efficient regulation and access to capital may find themselves better positioned. And multinational businesses will increasingly have to assess the entire economic substance of a jurisdiction rather than simply its headline tax rate.

That is a profound change in the way international investment decisions are likely to be made.

A New Phase of International Tax Competition

Hungary’s decision to block the EU directive demonstrates that the global minimum tax is not merely a technical tax reform.

It is a question of economic policy and national sovereignty.

The OECD framework seeks to establish a minimum effective tax rate for the world’s largest multinational enterprises. The EU seeks to translate that international agreement into binding rules across its member states. Hungary, meanwhile, is attempting to preserve the ability to use its tax system as one of the tools of national economic competitiveness.

All three positions are understandable.

The ultimate outcome will determine much more than whether multinational corporations pay 9%, 15% or some higher effective rate.

It will help determine what countries compete on.

For decades, corporate taxation has been one of the most visible instruments of international competition for investment. If the global minimum tax succeeds, that competition will not disappear. It will simply move.

Countries will have to compete more heavily on infrastructure, human capital, regulation, political stability, market access and economic substance.

For investors, the implication is equally important: the jurisdiction with the lowest tax rate will not necessarily be the jurisdiction offering the best investment environment.

The global minimum tax may therefore be the beginning of a new phase in international tax competition rather than the end of it.