Trade deal on the cards if Trump leaves Huawei alone

For weeks and weeks there has seemed to constantly be new stories to write about the US/China trade war, and on the eve of the G20 meeting, the dynamic duo haven’t disappointed.

This week, representatives of the 20 richest countries around the world will meet in Japan to discuss everything from fishing regulations through to finance and climate change. Telecommunications, and more specifically cybersecurity, will of course be on the agenda, and most importantly, it will feature in the meeting between President Donald Trump and President Xi Jinping.

Of all the bouts over the next couple of days, this will be the one everyone is paying attention to. The leaders of the worlds’ two largest economy, duking it out to gain supremacy. Trump has said he wants a trade deal, and so has Xi. These two nations not getting on is no good for anyone, but it seems neither wants to appear as weak and concede ground.

The latest development is coming out of Beijing. Xi has stated he is open to a trade deal between the two nations, but Trump would have to stop targeting Huawei as a proxy for passive and active aggression against the Chinese Government.

This is going to be a massive ask from the Chinese premier, as while Trump is fully willing to use companies as pawns in his greatest negotiation, the supporting cast in Congress might not be as willing. We’ve already seen this during the ZTE saga.

It might seem like a lifetime ago, but it was in mid-2018 ZTE found itself in the crosshairs of the White House. Trump built up the situation, seemingly as a demonstration of the power of the Oval Office, and once the point had been made he tried to stand down. But Congress stood in the way.

26 Senators, somewhat hardliners, attempted to block the de-escalation from Trump. They seemingly bought into the evil stories told by Trump as validation for such actions and weren’t willing to let the company off the hook. Trump wanted to play a game with ZTE as movable piece, but Congress wasn’t reading the rule book.

The same situation might happen here. Opinion in the US has been directed towards Huawei being the weapon of Chinese oppression on the world, and Trump has been the most vocal when it came to hyping the fear. Even if Trump does want to step down from this position to facilitate a deal, Congress might once again prevent him.

Trump seems to have done a good job in convincing politicians of the national security threat, and Congress does not seem to have the same game-playing attitude as Trump; if something is a national security threat, it will remain one. The opportunity of commercial gain will not change that.

This is of course assuming Trump wants to make a deal. Xi has played his hand, set out his demands with Huawei, and Trump seems to be just as combative. In interviews and tweets, the President has condemned Canada for tariffs on agricultural products, slammed India for its own tariffs and suggest China’s economy is ‘going down the tubes’.

Currently we have two Presidents who do not seem like they are going to shift. In their homelands they have created personas of strength, leaning on hawkish strategies not diplomacy. It would be fair to assume a continuation of the status quo.

G20 gets tough on tech tax as trade war gets agenda nod

20 bean-counters walk into a bar and ask for a tonic water. The barman asks who picking up the bill, and all fingers are pointed towards Silicon Valley.

In southern Japan, finance ministers and representatives of the central banking organizations have gathered to discuss the world of international and domestic finance. Of course, G20 is about much more than spreadsheets and calculators, but this weekend saw the accountants gather, while in the next room, ministers for trade and the digital economy were setting the world to rights.

Starting with the accountants, Silicon Valley is to remain the political punching bag of 2019.

“Specifically, in the area of international taxation, we will continue to have discussions on a review of the existing tax framework triggered by digitalization, in addition to fighting against tax avoidance and evasion,” Japanese Finance Minister Taro Aso said in a statement.

Of course, these politicians are savvy enough not to target a specific segment or highlight companies who are abusing the grey areas in the system. There are numerous different organizations outside of the tech sector who are mistreating globalisation trends for tax benefits, though the tech giants are the ones in the limelight right now.

In the G20 Finance Ministers and Central Bank Governors meeting, new ideas have been tabled suggesting governments around the world will be cracking down on the creative accounting techniques which are becoming ever-so-more common.

According to a communique seen by Reuters, the newly proposed rules would not only make it more difficult for the tech giants to make use of low-tax countries for their benefit, it would also work the other direction. Countries like Ireland, who have benefitted from offering loopholes to the tech giants, would have their freedoms curbed in the pursuit of fairness and a more level global approach.

The new rules would propose two different approaches to taxation. Firstly, companies would have to pay fair tax on the revenues which are derived in the country, and secondly, should the accountants find a way around these rules, a global minimum tax rate could also be introduced. It is the tax version of the Swiss Cheese model; the more layers which are incorporated, the more difficult it is to effectively create a tax evasion model for these organizations to follow.

For countries like the UK and France, this is a win, though the likes of Ireland, Luxembourg and the US will find the outcome frustrating. While the UK and France have been pushing for more stringent tax rules, Ireland and Luxembourg are attempting to protect the light-touch regulatory environments which benefits their own societies but screws everyone else.

The US has suggested any change to taxes was discriminatory to its own companies, effectively a raid on the US economy. Although US Treasury Secretary Steven Mnuchin has seemed relatively cordial in reaction to developments, it remains to see whether any further strain is placed on international relationships. The US is already struggling to maintain strong links with certain governments, and this presents another risk to stress relationships.

Mnuchin has also found himself in the news regarding the Huawei conundrum.

The US finance chief has said in Fukuoka that a trade deal between the US and China could ease the firm stance which is threatening to provide collateral damage all around the world. The statement quotes President Donald Trump, who made the suggestion over Twitter a few months back.

For those firms impacted by the ban, the reiteration of this statement might come as some relief, though critics will become increasingly frustrated. It seems the White House has little concern for collateral damage as long as its own ambitions are fulfilled. For the firms who supply products to Huawei or investors who have been left short by such a ban, the ease in which their livelihoods can be used by the White House as a disposable bargaining chip must be incredibly worrying.

This of course was a topic of conversation at the Ministerial Meeting on Trade and Digital Economy also.

“We continued our dialogue to mitigate risks and enhance confidence among exporters and investors, as we committed to do in Mar del Plata last year,” a briefing document states. “We affirmed the need to handle trade tensions and to foster mutually beneficial trade relations.”

While it might seem like a throw-away comment, perhaps we should appreciate the significance of recognising the situation. In most circumstances, governments would steer clear and allow the bickering duo to continue their chest-beating, however in recognising the circumstances perhaps we are closer to someone stepping in and de-escalating the situation.

Clearly neither the US or China can be trusted to be mature and manage the saga for a net-gain, so it might need a third-party to step in. As it stands, no-one is benefiting, and everyone is losing. The winner of this trade war will be the one which can be the least negatively impacted; that should not be considered an effective way to manage international relations.

OECD has decided to go ahead with a global digital tax

The OECD member states have agreed to move ahead with the plan to reach a global solution by 2020 to harmonise tax regimes on the digital companies.

The OECD and the G20 have a joint working mechanism, called Inclusive Framework, to address the tax issues related to digital economy, what are covered under an umbrella concept of Base Erosion and Profit Shifting (BEPS). After the most recent Inclusive Framework meeting held 23-24 January, a Policy Note was published to outline the agreed framework of the future solution.

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation. Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” Saint-Amans added.

In essence, the solution will be based on consensus on two key areas, or “pillars”: “One pillar addresses the broader challenges of the digitalised economy and focuses on the allocation of taxing rights, and a second pillar addresses remaining BEPS issue,” as the Note put it.

The first pillar will focus on how to modify the current tax practices based on physical locations of the businesses, re-examining the so-called ‘nexus’ rules, that is how to determine the connection a business has with a given jurisdiction, and the rules that govern how much profit should be allocated to the business conducted there.

The second pillar refers to the issues not yet addressed by the on-going BEPS project. In the past two years, a Forum on Harmful Tax Practices (FHTP), under the aegis of OECD/G20 BEPS Project, has reviewed and assess 255 tax regimes (there can be multiple tax regimes in one tax jurisdiction). The majority of them are either deemed not harmful, or amended to be not harmful, or abolished. These are submitted by signatories on the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”. So far, 87 jurisdictions have signed on the Convention. 19 of them have completed their domestic ratification processes, where the Convention has already become effective, or are going to come into effect soon.

However, the Inclusive Framework recognises that BEPS would not be able to cover every loophole, and there would be “continued risk of profit shifting to entities subject to no or very low taxation through the development of two inter- related rules, i.e. an income inclusion rule and a tax on base eroding payments”. Therefore the second pillar will be on how to make the solution more future-proof.

More detailed proposals will be published in the coming weeks, and they will be submitted to the next G20 Summit meeting in June.

The OECD/G20 programme is part of a global move to hold the webscale companies accountable to their tax obligations. Earlier countries like France and Spain have taken the matter in their own hands, while the EU was working to reach a Union-wide consensus but failed be approved by the Council of Finance Ministers. However, if the OECD consensus is accepted by 2021, the EU would withdraw its own tax anyway, according to the original plan.

Tax regulations can become draconian. For example, the US tax code has gone from 400 pages in 1913 to nearly 75,000 pages now. The Inclusive Framework is mindful of the danger, therefore demand the member jurisdictions “to make any rules as simple as the tax policy context permits, including through the exploration of simplification measures.”