Global tax deal risks having US half in, half out

Democrats' razor-thin majority in the US Congress may make it impossible for Washington to fully sign on to a budding international agreement.

Global tax deal risks having US half in, half out

When the U.S. on Thursday announced a with European countries that had slapped a levy on U.S.-based internet giants, it marked the latest piece of good news for negotiators crafting a comprehensive international agreement to tax corporate profits.

But a much bigger question still hangs over these talks: Can the U.S. deliver on its promise to join in the global deal, which is meant to come into effect in 2023?

At issue is whether President Joe Biden’s administration can sign on to the agreement — negotiated through the Organisation for Economic Cooperation and Development — with Democrats controlling only a razor-thin majority in Congress. Amid staunch Republican opposition, the political math likely means that, at best, U.S. lawmakers could approve only part of the wholesale rewrite of the world’s tax system, experts say.

U.S. Treasury Secretary Janet Yellen has said the administration will find a way over the next year to join the agreement. But the snag lies with Congress, where Democrats are scrambling to finish work and unify the party on sweeping social policy legislation that also happens to be the one and only vehicle for pushing tax changes through by year-end.

If Democrats succeed in passing that measure — a heavy lift as is, because it effectively requires party unanimity — it could include language that would align the U.S. with one of the two core elements of the OECD deal: the establishment of a global minimum corporate tax of 15 percent. But the other plank — which would tax profits of huge multinational firms, including digital giants, and then re-allocate the cash wherever they have operations globally — would likely require changes to existing tax treaties, because it rests on international cooperation.

And therein lies the rub for Democrats: Treaty changes require two-thirds approval in the 100-member U.S. Senate, including the support of 17 Republican senators. To date, Republican opposition is rock solid.

Republican Senator Patrick Toomey was blunt in a recent hearing: “I think that’s unlikely to happen.”

As some tax experts see it, as long as the world’s largest economy is at least partially committed, it won’t be a fatal blow to the global agreement overall. But under such a “half in, half out” scenario, it could mean that more and more countries jump on the digital-tax bandwagon on their own to get a swipe at those profits absent an international deal.

“If the global deal falls apart, it’s more likely that countries like India and others look at digital taxes,” said Reuven Avi-Yonah, professor at tax law at the University of Michigan. “These countries will continue to move unilaterally.”

Progress to date

For years, countries tried to find a way to tax giants like Facebook and Google, which operate in many jurisdictions where they have little or no physical presence. That’s one reason why such firms often pay hardly any tax.

Under the OECD-led process, negotiators sought to address that shortfall by finding a way for national governments to pocket some of that profit, based on a formula that distributes that cash depending on where companies operate. They also pitched a minimum corporate tax rate to stop multinational firms from exploiting tax havens to reduce their overall global bill.

These talks dragged on for years and faced political headwinds, including the position of the Donald Trump administration that any such overhaul should be merely voluntary. But the change in U.S. presidents, combined with pressure from the digital-tax boomlet in Europe, opened the door to a rough framework agreement last summer. That was followed by sign-off by G20 nations earlier this month, clinched with the support of longtime low-tax holdouts like Ireland after considerable horse-trading.

The first part of that deal, known as Pillar One, ensures that the world’s 100 biggest companies pay taxes on their global operations and sales. It uses a complex formula in which 25 percent of the profits for companies with a profit margin of at least 10 percent and annual revenues of at least $20 billion will be divided up globally. That way, governments around the world, including in developing countries, will be able to capture additional tax revenue from those firms, which include the internet giants. The OECD estimates the provision would distribute around $125 billion in corporate tax receipts among participating governments.

The second part of the deal, Pillar Two, sets an international effective minimum corporate tax rate of 15 percent for companies with annual revenues of at least €750 million. It would allow countries, collectively, to pocket an additional $150 billion in yearly tax revenue. Those changes are expected to come into force by 2023, after national governments approve the required domestic legislation.

Getting to yes in Congress

Despite progress at the global level, U.S. political divisions mean that everything hangs in the balance in the next few weeks in terms of what Washington can deliver. Democrats are throwing all their efforts into getting their massive social-spending bill — which covers everything from health care to parental leave to climate change — over the line with the barest of majorities. It will also include an array of tax hikes, including on corporations, to pay for some of these programs.

Because Republicans are uniformly opposed to that bill, Democrats in the Senate are relying on a special procedure, known as reconciliation, that lets them pass certain types of legislation in the upper chamber with just a simple majority of 50 votes, rather than the usual requirement of 60 to break a filibuster. Their challenge is getting recalcitrant moderate Senate Democrats on board while ensuring that the very narrow Democratic majority in the House of Representatives also signs on.

The other challenge for congressional Democrats and the Biden administration is that there are no other real options for advancing tax changes this year, because the reconciliation option can usually be used just once every fiscal year.

However, they do have one advantage in that the U.S. already has a provision, enacted in Trump’s 2017 tax reform, that taxes U.S.-based multinationals on their foreign income, known as Global Intangible Low-Taxed Income (GILTI). The measure is meant to broaden the net of U.S. taxation on American firms that would otherwise park their profits abroad.

In its current form, the GILTI effective rate is around 10 percent, and it allows firms to “pool” their international liability across high- and low-tax jurisdictions. To harmonize that provision with the OECD deal, then, Congress would likely have to raise the rate to the agreed global minimum rate, as well as apply it country-by-country, which economists say would bring in much more in tax receipts.

“GILTI is a weak stick but at least it’s a stick,” said Thornton Matheson, an economist and senior fellow at the Urban-Brookings Tax Policy Center in Washington, D.C. “Right now the U.S. is the only major country applying a global minimum tax. Through an expanded system like Pillar Two, you could bring in a lot more revenue.”

That change still may be a heavy lift, given that some moderate Democrats and many Republicans are concerned that changes to GILTI language could wind up topping the 15 percent global rate and make the U.S. uncompetitive compared with other countries. Some also say that the U.S. shouldn’t get ahead of other countries in adopting that tax. But at the very least, House and Senate negotiators have already written legislative language that can be used in the final iteration of the social-spending bill if they want to tap into international taxation to help pay for their domestic priorities.

Glass half full?

Should Democrats succeed in passing their domestic agenda and include sufficient changes for international taxation, the U.S. could put something on the table in the OECD talks. And Democrats may have a chance to enact tax fixes again next year, should they pursue another reconciliation package — although the 2022 congressional midterm elections may make lawmakers more skittish about any sort of bold legislation, including controversial tax hikes.

Still, the question remains how the U.S. could sign on to Pillar One without a super-majority of Democratic and Republican senators backing treaty changes. In this scenario, then, the final OECD deal may be largely centered on a global minimum tax, but lack a mechanism to tax and reallocate profits from the largest multinationals, including the digital giants.

Would that leave the likes of Facebook and Google off the hook? Not necessarily, in the eyes of some economists, who say more countries keen for the extra revenue may pass digital taxes of their own. If these levies hit large multinationals, the firms’ home countries could offer them a foreign tax credit to make up the difference — similar to what the U.S. agreed to on Thursday with European negotiators: The European digital taxes will continue until the OECD deal takes effect, and until then, Washington will let multinationals write off those payments to the U.S. Treasury.

At a broader level, however, the U.S. strongly opposes other countries going their own way on digital taxes as long as the OECD deal is being worked out.

In terms of getting to a global deal, the U.S. is “indispensable because so many large multinationals are based there,” says Dhammika Dharmapala, an economist and professor at the University of Chicago Law School. “But absent a deal, if other governments feel they need to find another way to tax digital giants, they can address that through their own digital taxes.”

Despite their unpopularity in Silicon Valley, he added, those kinds of levies are attractive to some governments in that they tax gross receipts — in the countries where consumers actually live — rather than profits, which can be shifted.

“If there’s a political push for taxing digital firms, these [levies] are a more direct and targeted solution, and if their rate is not too high, they may not be too disruptive,” he added. “In that sense, digital taxes are perhaps not as bad as some have suggested.”

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Black flags and crucifixes: Italy vaccine passport protests unite strange bedfellows

Anarchists, neo-fascists and radical left activists from Italy's social occupations are among those opposing the so-called green pass.

Black flags and crucifixes: Italy vaccine passport protests unite strange bedfellows

ROME — It’s said that politics makes for strange bedfellows. Protests in Italy against the strict vaccine passport rules set by the government to chart a course out of the pandemic are proving that adage right.

Demonstrations against rules mandating vaccine status checks, or at least negative tests, have brought together a disparate alliance, stretching from anarchists and trade unionists to neo-fascists and ultra-conservative Catholic groups.

The measures have sparked demonstrations across Italy. Last weekend anarchists clashed with police in Milan. In Rome, neo-fascists stormed a union building and a hospital, leaving dozens of police injured.

Sometimes both ends of the political horse-shoe have met. In an unusual sight for Italy’s hyper-partisan politics, protests in Milan saw anarchists rubbing shoulder to shoulder with demonstrators carrying signs dedicated to the Virgin Mary and Padre Pio, a popular saint venerated in Italy.

Italy has a history of political violence between the right and the left. During the so-called years of lead, in the 1960s, ’70s and ’80s, hundreds were killed in clashes and terrorist attacks. While the violence has abated, it hasn’t disappeared entirely. And episodes still occur from both the far left and right.

But the backlash against the green pass has, temporarily at least, bridged this divide for some. It’s an interesting turn of events given that Italy is often seen as a “political laboratory” that anticipates political trends elsewhere.

Social frictions

Alessandro Orsini, director of the Observatory on International Security at Luiss University Rome and author of a book-length investigation into the far right called “Sacrifice. My Life in a Fascist Militia,” said it suited the radical left and right to work together to exploit social frictions around the government’s pandemic policies to destabilize the country.

“They did so in the 1970s. They can cooperate while they both share the same aims,” he told POLITICO. Some neo-fascist groups were also seeking to conceal their identity so as not to scare off new recruits, he added: “In this way Italians who are not fascists become sympathizers.”

Trieste has become the capital of the resistance since dock workers occupied the strategically vital port last week with protests bringing together radical left occupations and the extremist right from all over northern Italy. The Trieste authorities banned another demonstration on Friday that had been expected to draw a crowd of 20,000, and the fact that these groups are usually antagonists is contributing to anxiety ahead of the G20 summit being held in Rome next week.

Since October 15 all workers must be vaccinated or get tested every few days, as part of the toughest regulations in Europe. Those who refuse can be suspended without pay.

The vaccine pass has broad acceptance in the middle of society, with surveys suggesting more than half of Italians support the measures. Prime Minister Mario Draghi’s government has made the case that vaccines will prevent further lockdowns and safeguard the recovery, with the Italian economy expected to grow 6 percent this year. More than 80 percent of over 12-year-olds are vaccinated.

Means of distraction

The opposition far-right Brothers of Italy party calls the measures a means of distracting people from the government’s failings. Draghi also faces dissent from the parties within his own government, with Matteo Salvini of the right-wing League, and Beppe Grillo, the founder of the 5Star Movement, pushing for the state to pay for coronavirus tests.

Outside parliament a vocal and eclectic minority remains skeptical or hostile. Giorgio Agamben, a well-known political philosopher, described the green pass as a first step towards a dangerous suppression of liberties.

Activists from across the spectrum taking part in the protests share that view. Sandro Bruzzese, a member of the Unione Sindacale Italiana, an anarchist-affiliated trade union, told POLITICO he was opposed to the green pass, seeing it as a way to privatize public health measures, for example by having vaccine-hesitant workers pay out of their own pocket for coronavirus tests.

Sandro Pescopagano, a life-long activist on the far left who was protesting with Trieste dockworkers, left the Confederazione dei Comitati di Base (Cobas) trade union — a militant rank-and-file union well to the left of the large traditional trade unions — because it was insufficiently opposed to what he described as the creeping threat of digital surveillance that was represented by the green pass. Now he has joined a newly created union called Sindacato dei Popoli Liberi — the Union of Free Peoples.

Pescopagano said he believed that the pandemic was just a pretext, and that eventually the green pass would be used to control where people were allowed to go, for example barring them in case of infractions.

The breakaway trade unionists now find themselves standing side by side with activists from very different political traditions. Dario Giacomini, a doctor who ran as a parliamentary candidate for the neo-fascist Casapound group in 2013, is working with union leaders in the new Trieste protest organizing committee. For Giacomini, who founded Contiamoci, an association representing healthcare workers who were suspended after refusing vaccination, the green pass is “an instrument of discrimination” and of no use as “it does not demonstrate the condition of health.”

‘We are all for freedom’

In this new climate it appears that old political affiliations matter less, as long as goals are shared. Giacomini, who now claims to be apolitical, said the old politics of left and right “are outdated”: “They have both always been welcome in my house. We are all for freedom.”

Pescopagano agreed. “Lately in Trieste there are many people that are coming together from opposite ends of the political spectrum,” he said. “We don’t care about that as long as we share the vision of opposing the dictatorship.”

But not all the leftist protesters welcome right-wingers with open arms.

Bruzzese said he would “never join a demonstration with right-wing protesters.”

“There’s a gulf between us and them,” he said. “We don’t exploit the green pass, we don’t exploit vaccines.”

Mindful of their image, some protest organizers have tried to distance themselves from extremist groups. Edoardo Polacco, a lawyer who organized the protests where neo-fascists were arrested in Rome, denied that there were any extremists in the movement. “There are no ideologies anymore of left or right,” he said. “Our movement is apolitical, transversal.”

With the G20 in Rome next week, security expert Orsini said that there were risks. Authorities will be anxious to avoid a repeat of the G8 Genoa in 2001, when anti-globalization and anarchist riots followed by police brutality overshadowed the talks.

“They must not let their guard down,” Orsini said.

Source : Politico EU More   

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