Washington Scraps Tax Treaty with Hungary

In January, the US-Hungary tax treaty nullification announced a year and a half ago, has came into force. Of note, the US, unlike its allies, has not terminated its similar favorable agreement with Russia and continues to conduct active business relations with the warring country.

20200604 Budapest Pénzváltó Exclusive Change Valutaváltó Fotó: Kallus György LUS Világgazdaság VG Fotó: VG/Kallus György

In July 2022, the United States announced that it would terminate the international treaty signed with Hungary in 1979, that waived the dual income tax payment practice.

Consequences of no US tax treaty?

Although the provisions of the US-Hungary tax exemption treaty were still applicable until the end of last year, the termination of the provision will have a serious impact, expressed in major tax payments, on the activities of affected individuals and companies from this year forward.

The main purpose of double taxation exclusion conventions is to prevent income from being taxed twice by different countries. Where no such convention exists between two countries, only the domestic laws of the countries apply in determining the amount of tax that is levied on certain income, and whether tax paid abroad is taken into account in determining tax liability and, if so, to what extent.

The termination of the US-Hungary tax treaty will likely be painful for Hungarian companies that receive income from the US. This is somewhat tempered by the fact that tax deducted in the United States can, to some extent, be taken into account in determining Hungarian tax liability even in the absence of a treaty. In fact, 90 percent of US source withheld tax can be deducted from Hungarian corporate tax, but the deducted amount cannot exceed the average amount of tax due on the income in question, so that in fact no more than 9 percent of the tax paid abroad can be taken into account.

The United States is the largest investor in Hungary outside the European Union, accounting for nearly nine percent of total investments. Bilateral trade in goods increased from 7.1 to 8.3 billion dollars in 2022, an increase of 16 percent, breaking the record for bilateral trade volume, Hungarian Finance Minister Mihaly Varga said after the US-Hungary Business Council (USHBC) meeting last October. 

Minister of Finance Mihaly Varga (Photo: MTI/Lajos Soos)

Even though much has transpired between Washington and Budapest since announcement of the agreement termination, it is still an unfriendly move with far-reaching consequences. As part of the autumn tax package, the Hungarian legislature has also reacted to this unfavorable situation in many respects, Economx wrote in December.

Washington still considers Russia important business partner

Both Moscow and Washington are positioning themselves as world powers, and in the shadow of the emerging new world order, both have strengths and weaknesses.

Both great powers utilize and exploit their economic resources differently. The US economy is the world's largest, accounting for 22.4 percent of global GDP in nominal terms and 16.6 per cent of global GDP, and boasts the world's largest manufacturing industry. Russia, on the other hand, has an abundance of rare and semi-rare raw materials and minerals, in addition to its almost inexhaustible natural gas and oil resources, Security.com writes.

The fuel tank site of Russian oil pipeline giant Transneft on December 13, 2023. (Photo: Natalia Kolesnikova/AFP)

It is clear that Russia is more dependent on the West regarding energy than the West is on Russia. The US has previously considered banning imports of oil and related products from Russia, to which the Kremlin has responded by threatening an oil crisis. Russia currently produces 40 percent of the European Union's natural gas and accounts for nearly a tenth of the world's oil production. The state also has significant coal reserves of around 175 billion tonnes: all of which feature prominently in current conflicts;

Even after the outbreak of the Russia-Ukraine war in February 2022, the US did not cancel or suspend the US-Russia tax agreement signed by George Bush and Boris Yeltsin in 1922. The US side had no intention of terminating it, but Putin finally suspended it in August 2023, Consultant.ru writes.

Not only did the US not terminate the agreement, but it has continued to conduct business with Russia, which it is at a (proxy) war with, ever since.

Russia and the US have never been significant trading partners of each other, so sanctions on imports is only a very small slice of the retaliatory strategy, but evidently that too, only exists in words.

Despite the sanctions, the United States still imports hundreds of millions of dollars worth of goods from Russia every month.  

Although back in 2022, Joe Biden promised to "inflict pain" and "a devastating blow" on Vladimir Putin through trade restrictions on commodities such as vodka, diamonds and gasoline, hundreds of other types of unauthorized goods worth billions of dollars continues to flow into US ports, Associated Press (AP) reported in early fall 2022.

The AP found that more than 3,600 shipments of wood, metal, rubber and other goods from Russia arrived in US ports, a significant drop from the previous period, but still more than $1 billion worth of trade per month.

If we impose sanctions, it could disrupt global trade. So what we need to do is to think about which sanctions will have the greatest impact while also allowing global trade to function

Ambassador Jim O'Brien, head of the State Department's Sanctions Coordination Office, told AP. 

Products currently banned, such as Russian oil and gas, continued to arrive in US ports long after the sanctions went into effect. In some cases, the origin of products shipped from Russian ports is difficult to identify. US energy companies continue to import oil from Kazakhstan through Russian ports, although this oil is sometimes blended with Russian fuel.

Aluminium filaments at Hydro Aluminium GmbH in Rackwitz, Saxony, Germany during ceremonial opening of new production line on September 14, 2023. (Photo: N: WILLNOW/DPA/DPA Picture-Alliance via AFF)

Russia is a key exporter of metals such as aluminium, steel and titanium. Most US companies dealing with metals have long-term relationships with Russian suppliers. Such trade, especially in aluminium, has continued virtually uninterrupted even after the beginning of the war,

Russian aluminium is used in US auto parts, airplanes, soda cans, cables, ladders and solar racks. The largest US customer in early 2022 was a subsidiary of Russian-owned global aluminium giant Rusal. In April 2022, Rusal America's top executives bought the US part of the company and renamed it PerenniAL. In July 2022 alone, PerenniAL imported more than 35,000 tonnes of aluminium from Russia.

But private companies that source materials from Russia include US government contractors, which are supported by federal tax dollars. Examples include Boeing, the world's largest aerospace company, and another metal importer, Tirus US, the largest global producer of titanium, essential for fighter jets. Not to mention the wood, fuel and Russian munitions favored by U.S. fighters, the AP reported.

These dealings don't seem to interfere with US interests, unlike Hungary, which the Biden administration is slowly trying to regulate not only economically but also physically.

Cover photo: Illustration (Photo: Gyorgy Kallus/Vilaggazdasag)