INTERNATIONAL TAX: EU ambassadors reach megadeal on global minimum tax, Ukraine aid and Hungary’s RRF funds.

As published on bne.eu, Tuesday 13 December, 2022.

EU permanent representatives on December 12 reached a deal that should pave the way for Hungary to receive €5.8bn from the post-pandemic recovery fund (RRF) in exchange for the country’s support for the global minimum corporate tax and €18bn in aid for Ukraine.

The deal will help Hungary fill its yawning budget deficit and should steady the forint, the EU's worst performing currency this year.

The Czech rotating presidency announced in early December 13 that member states in principle had agreed on the package of issues requiring unanimity. Hungary was widely viewed as blocking the two major EU policy decisions – the global minimum corporation tax agreement and the immediate short-term financial relief for war-torn Ukraine – to put pressure on the EU to release EU funds earmarked for the country but frozen over its violations of the rule of law.

Last week the EU Council agreed to avoid the Hungarian veto on the Ukraine aid by making each member state take on financial responsibility individually, so that the money will not be lent at EU level,. The loan would be provided based on bilateral agreements between 26 member states and the European Commission.

On Monday, Hungary finally agreed to drop its veto over the OECD-agreed global minimum corporate tax of 15% to be applied to large multinational companies with a combined annual turnover of at least €750mn, as well as its veto of the €18bn relief package for Ukraine.

The permanent representatives of the member states approved Hungary’s €5.8bn recovery fund, following a recommendation by the Commission earlier this month. The failure to approve the plan before the end of the year would have meant Hungary would lose 70% of the funds. According to financial website Portfolio.hu, only Netherlands abstained from the vote.

In order for Budapest to access these funds or vital Cohesion funds from the EU budget from 2021-2027, however, it needs to fulfill strict milestones set by the European Commission.

EU member states stood by the ongoing conditionality mechanism against Hungary that ties access to EU Cohesion funds to implementing widespread reforms to tackle corruption and guarantee the independence of the judiciary, among other issues.

But member states agreed to freeze only €6.3bn of the three Cohesion funds, which is €1.2bn less than originally proposed by the EC, "given the degree of cooperation” by Hungary.

Member states acknowledged the work done by the Hungarian authorities but decided that these remedial measures do not sufficiently address the identified breaches of the rule of law and the risks these entail for the Union budget.

The European Commission waited after the Hungarian elections in April 2022 to trigger the rule-of-law conditionality mechanism – launched for the first time against an EU member – which are aimed at ensuring that EU countries adhere to the bloc's general principles as well as safeguarding the EU's budget.

In September, the European Commission proposed freezing €7.5bn from the EU budget for 2021-2027 to Hungary, covering three Cohesion funds, as well as the €5.8bn RRF money, over concerns about the rule of law, despite Budapest's pledges to implement reforms.

Hungary had until November 19 to approve a set of laws but the EC’s assessment deemed Hungary’s efforts to tackle corruption and improve the rule of law as insufficient and set 27 essential milestones to meet.

Efforts by Budapest in recent months to tackle corruption and improve the rule of law with the aim of appeasing Brussels were not sufficient to unblock the money, the Commission declared in a statement on November 30.

The Commission in a recent report found that systemic irregularities, deficiencies and weaknesses in public procurement still exist, there are limitations to effective investigation and prosecution of alleged criminal activity. The government had set up an anti-corruption working group and the Integrity Authority, a state administrative body, autonomous of the government, but there is lack of a comprehensive anti-corruption strategy covering also the most relevant corruption prevention areas. Public interest trusts remain outside the scope of EU public procurement directives, the EC said.

To suspend the funds to Hungary, approval by a qualified majority of EU countries is needed, meaning at least 15 of the 27 EU states, which together must make up at least 65% of the total population of the EU.