Hungary has recently found itself in a precarious position within the global tax landscape. Some years ago, the country lost its tax treaty with the U.S., leaving its businesses unprotected against potential unilateral tax increases under Section 891 of the U.S. Internal Revenue Code. This development places Hungary among the jurisdictions most vulnerable to the U.S.'s retaliatory tax measures, particularly in the context of the OECD's Global Minimum Tax initiative. As a result, Hungary's role in the international tax arena is now more critical than ever, as it navigates the challenges posed by the absence of formal protections against discriminatory taxation.
The Scope of Section 891
The latest executive actions by U.S. President Donald Trump have sent shockwaves through the international tax landscape. With his January 20 memorandum, Trump made it clear that he intends to challenge the OECD's Global Minimum Tax (Pillar Two) and retaliate against countries implementing tax measures that he deems discriminatory or extraterritorial. At the center of this action is Section 891 of the U.S. Internal Revenue Code, an obscure but powerful provision allowing the doubling of U.S. tax rates on companies and citizens of targeted foreign nations.
Under Section 891, if the U.S. President determines that American citizens or corporations are being subjected to discriminatory taxation by another country, U.S. income tax rates on that country's citizens and corporations are automatically doubled. The additional tax collected is capped at 80% of U.S. taxable income, ensuring that even at its maximum, the tax burden does not exceed the taxpayer's ability to pay.
Although never before applied, Section 891 now appears to be an active policy tool in the U.S. response to the OECD's global tax initiative. Trump's memorandum directs the U.S. Treasury and Trade Representative to investigate tax practices abroad that disproportionately impact American businesses and to identify foreign jurisdictions not in compliance with existing U.S. tax treaties.
Practical Consequences for Non-Treaty Countries
While the potential impact of Section 891 is broad, the most vulnerable jurisdictions are those that lack a Double Taxation Treaty (DTT) with the U.S. These countries have no formal protection against unilateral U.S. tax increases, leaving their businesses at significant risk. The key implications include:
Doubling of U.S. Tax Liabilities
For companies and individuals from non-treaty countries, this means:
- Corporate tax rate increases from 21% to 42% for affected businesses with U.S. operations.
- Personal income tax rates could reach as high as 74% for individuals earning taxable income in the U.S.
- Withholding tax rates on dividends, interest, and royalties would also double from 30% to 60%, severely impacting capital repatriation.
Lack of Treaty Protections Against Discrimination
Most U.S. tax treaties contain non-discrimination clauses, ensuring that foreign nationals and businesses receive equal treatment to their U.S. counterparts. However, without such a treaty, foreign companies from non-treaty jurisdictions would have no recourse against the punitive effects of Section 891.
GLOBE Membership Does Not Provide Safeguards
Being part of the GLOBE tax framework does not inherently protect a country from the U.S. retaliatory tax measures. If the U.S. government determines that a GLOBE-compliant jurisdiction's tax system unfairly targets U.S. businesses, that jurisdiction could still be subject to Section 891 enforcement.
Countries at the Greatest Risk
Jurisdictions that are GLOBE signatories but do not have a tax treaty with the U.S. face the highest level of exposure. Notable examples include:
- Hong Kong – Lacks a tax treaty with the U.S. and is often scrutinized for its tax incentives.
- Bermuda – A known tax haven with no formal U.S. treaty protections.
- Singapore – Despite its global financial standing, its tax policies have been criticized for enabling base erosion strategies.
- Hungary – Recently lost its tax treaty with the U.S., leaving its businesses unprotected.
Strategic Considerations for Affected Jurisdictions
For countries caught in the crosshairs of Trump's tax war, potential mitigation strategies include:
- Negotiating a U.S. Tax Treaty – Establishing a formal agreement could provide legal protections against Section 891 enforcement.
- Tax Policy Adjustments – Aligning local tax rules to avoid U.S. allegations of discriminatory taxation.
- Diplomatic Engagement with the U.S. Treasury – Seeking direct negotiations to clarify tax treatment and minimize exposure.
Conclusion: A High-Stakes Tax Showdown
Trump's latest actions mark a significant escalation in global tax politics. By invoking Section 891, the U.S. is signalling its willingness to counter the OECD's global tax regime with unilateral financial penalties. Non-treaty jurisdictions, particularly those in the GLOBE framework, should closely monitor these developments and assess their exposure to retaliatory tax measures. In the absence of protective agreements, affected countries may face severe economic repercussions in their dealings with the U.S. market.
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