The 2021 Business Cost Index has published its annual data, a report that is used by companies and investors as a reference point in starting a business abroad. As well as listing US business cost data broken down by states, the report also has a global index that ranks 31 countries, mostly those located in Europe, in terms of business, energy, or taxation expenses, plus wages and other criteria.
For those familiar with global taxation rates, it will come as no surprise that Hungary should be so high up on the list of those countries where starting an international business comes at a low cost. However, after the post-COVID global economic reshuffle, Hungary has actually managed to come up on top of the list of cheapest countries to invest in. The index takes into account average annual wages, average electricity price (cents per kWh), average internet price per Mbit, and top corporate income tax rate, all of which are then summed up in a 1 to 10 business cost affordability score. Hungary managed to score 8.31 points, followed by Lithuania (7.89), Czech Republic (7.39), Estonia (7.13), and Poland (7.03).
The bottom of the list is occupied by none other than the big European and global economic powerhouses, with Germany scoring the least amount of points (2.98), followed by Australia (3.49), Denmark (3.63), the United States (3.66), and Switzerland (3.81). As far as international investors and manufacturers are concerned, all these countries are weighed down by high corporate taxation and high wages. Almost all of those at the bottom of the list are, in their turn, high up in the Global Competitiveness Index that assesses the ability of countries to provide high levels of prosperity to their citizens. This depends on how productively a country uses available resources. In this regard, Hungary is in the top one-third.
Hungary coming out on top of the global list of countries that are cheapest for investment is influenced mostly by two data: low wages and exceptionally low corporate taxation (9%). Some might argue that low wages are nothing to brag about, or that employees could be paying the price for the country’s attractiveness for investors. However, if living costs are taken into account, Hungary has the third-lowest in the EU, right after Romania and Poland. A Hungarian employee earns around USD$25,400 per annum, which is well over the $23,600 mark for Slovakia that only manages 7th place in the index of cheapest countries to invest in.
Energy prices in Hungary are fairly average, yet the price of fast internet connection, which is an increasingly important factor for businesses, is one of the cheapest in the EU. However, the pièce de résistance, with which the Hungarian government of Viktor Orbán has managed to attract record levels of foreign investment, is without doubt the 9% corporate tax that is one of the lowest among developed countries. After the global economic slump caused by the Coronavirus pandemic, Hungary is expected to grow a record 7.5% in 2021, largely due to the fact that its government was able to maintain high levels of foreign investment in the country, even during the difficult past year and a half.
In the coming years, the biggest challenge for the Hungarian economy in terms of maintaining its attractiveness for foreign investors will be the introduction of the global minimum tax rate proposed by the Joe Biden administration. This was nominally introduced in order to reign in tax-dodging US technology giants, but critics have pointed out that it will also hit smaller economies like Hungary, whose low tax rates have helped maintain competitiveness. In fact, the Hungarian government has resisted the introduction of the 15% corporate tax alongside Ireland and Estonia, yet with Ireland recently announcing their compliance with the proposals, Hungary, fearing US measures, had to follow suit.
Hungarian finance minister Mihály Varga has announced that the minimum corporate tax rate will not be raised from 9%. Instead, Hungary will introduce measures tailored to individual cases that will balance out the difference between the Hungarian 9%, and global 15% minimum corporate tax rates. There will also be a ten-year transitional period before introducing the new measures, which in practice means that the Hungarian government is playing a waiting game while it looks into measures to balance out negative effects of the global tax rate by other economic means and incentives, such as government subsidies for foreign investors.