US Treasury gives notice to terminate the US-Hungary income tax treaty

In detail

The United States has rarely terminated a US income tax treaty. The last termination was the 1980 US-Malta income tax treaty in 1997 (a new treaty was entered into in 2008). Prior to that, the United States terminated its tax treaty relationship with the Netherlands Antilles in 1987. After having provided a notice of termination of the treaty relationship (actually, an extension of the US income tax treaty with the Netherlands), the United States partially withdrew its termination notice after realizing that the termination notice had a negative impact on the Eurobond market; the partial withdrawal reinstated the interest article of the treaty in order to stabilize the Eurobond market.

As noted in the July 8 Wall Street Journal article, “[t]he US move amounts to a counterpunch against Hungary, which has emerged in recent months as an obstacle to the global minimum tax deal negotiated last year by Treasury Secretary Janet Yellen. As a member of the European Union, Hungary must give its approval before the bloc can approve broad rules for implementing the new system.” Hungary is currently blocking the European Union’s implementation of the global minimum tax agreement under Pillar Two of the OECD’s BEPS initiative.

Hungary has received support from Republican officials in its resistance to the global tax deal – GOP Reps. Adrian Smith (Neb.) and Mike Kelly (Pa.) sent a letter to the Hungarian ambassador to the United States commending the country for opposing the global tax accord. However, there were reports this week that Hungary was working its way towards an accommodation with the European Union on recovery funds, which might also have resolved this impasse. Presumably, if the principal motivation for the Treasury’s termination notice was to put pressure on Hungary with respect to its position on Pillar Two of the OECD project, if Hungary does lift its OECD Pillar Two objections, the United States could withdraw its treaty termination notice, as it did, at least partially, in the case of the US-Netherlands Antilles treaty. Treasury reportedly has defended its decision to terminate the current Hungarian treaty based on Hungary’s low corporate tax rate of 9% and lack of withholding taxes on payments to non-residents.   

Under the general treaty law (Vienna Convention), the notice of intent to withdraw can be rescinded before it is effective. In other words, if Hungary lifted its objections, the United States could reverse itself. An additional issue to consider is the role of the US Senate in US treaties. Under the Constitution, no treaty negotiated by the Executive Branch can enter into effect without the advice and consent of the Senate. However, there is no explicit requirement that the Senate consent to the termination of a treaty. Despite the lack of a clear Constitutional requirement, the Executive Branch has, in the past, been careful to coordinate any action it takes on treaty matters with the Senate Foreign Relations Committee, the Senate Committee with jurisdiction over treaties. It is unclear whether any such coordination, or sufficient advance notice, was given to the Senate or is formally required in this case.