BUDAPEST: Hungarian Prime Minister Viktor Orban has pledged to slash the corporate tax rate to single digits in 2017, as part of an agreement with business on October 24 to increase minimum wages by 15% next year.
Such a huge cut to the headline corporate tax from 19% could turn Hungary into the tax haven of Central Europe. However, as other business costs remain elevated and the country struggles with a serious shortage of skilled labour, the tax cut might not be enough to significantly boost Hungary’s competitiveness and FDI inflow.
As part of its fiscal adjustment strategy, the ruling Fidesz party has imposed special taxes that have mostly hit international investors. Since 2010, foreign media companies, retailers, energy suppliers and tobacco sellers have complained of discrimination, hurting the country’s investment reputation.
In 2016, Hungary scored an all-time low and became a the sharpest slider in Central and Eastern Europe in the Global Competitiveness Index (GCI) 2016-2017, mainly due to institutional weakness, including a lack of transparency in government policymaking and advantages handed to “privileged businesses”. Meanwhile, net foreign direct investment (FDI) has decreased, reaching a record low of -€15.37bn in the last three months of 2015, and staying negative all this year so far, pushed down by high dividends and repayment of loans by foreign-owned companies.
The government now seems determined to step up efforts to improve its international ranking and lure back foreign investors to the country. Some analysts argue that the earlier turbulent times are over, and the huge reduction of corporate tax – coupled with a decrease of employer social security contributions – suggest that the government aims to begin a new era of consolidation by creating a friendly tax environment.
