After last Wednesday’s rally that was triggered by bright demand outlook in the second half of the year a dose of calmness or maybe undecidedness lingered around the market. This uncertainty has been preventing oil price rising significantly or fall considerably. The optimistic future is clouded by the pessimistic present. Global infection rates are still high, the second highest daily cases this year were registered on Friday and the global death toll is now over the grim 3 million mark. The UK Prime Minister cancelled his trip to India, a major oil consumer and the country has been added to the coronavirus “red list”.
Yet oil prices registered small gains on the day partly because of the weak dollar. Its index has slipped again yesterday and at around 91 points it is 2.6% below the peak at the end of last month implying rising risk appetite. Additional support arrived just before the close when Libya’s National Oil Corp declared force majeure on exports from the port of Hariga. The hiatus came over a budget dispute between the central bank and the NOC with the latter warning that the measure can be extended to other operations, as well. This is the major reason why the prompt Brent spread jumped 11 cents/bbl yesterday. Follow-through buying is pushing prices further up this morning but the immediate upside potential could be limited by the relentless march higher in infection rates.
An important stride towards global taxation
If Donald Trump is yin then Joe Biden is yang. If the former US administration was protectionist the current one believes in globalization. It is actively pursuing to change and reverse several of the decisions of its predecessor. The US is now planning to re-join the Paris Climate Accord and it is doing its best to revive the Iranian nuclear talks despite the seemingly insurmountable obstacles ahead. Whilst Donald Trump rejected the idea of European partners imposing digital tax on US tech companies out of hand and was quick to slap extra tariffs on European delicacies his successor is advocating a strikingly different approach towards international taxation.
The issue of global taxation has been gaining importance and has become the centre of attention of policy makers all around the world ever since technological advances made it feasible to conduct business in one country without physically being present there. This has led to tax avoidance where companies shifted their profit to their subsidiaries based in low tax jurisdiction. In fact, they purposefully set up these subsidiaries to minimize their tax obligations. This, in turn triggered a race to the bottom whereas countries reduced their corporate tax rates in order to attract international tech companies and others.
Lack of international agreements and co-operation forced countries to take unilateral steps to impose their own digital service taxes. The UK, for example, introduced a 2% levy on the revenues of search engines, social media services and online market places which derive value from UK users, effective April 1, 2020. These countries, however, will likely drop unilateral taxation in case an acceptable international agreement is reached.
It is in this climate that the US proposal came to light. The US Treasury, led by Janet Yellen, the former head of the Federal Reserve, detailed the idea in a document that has been sent to 135 countries. The proposal stands on two pillars.
The first one is to lay out a new tax regime for the largest multinational companies in the world. The idea is that these enterprises would pay taxes based on the sales in each country. The US proposal would only subject very large firms to these tax arrangements. Under the plan other countries will be able to increase their tax revenues from technological companies, the likes of Google, Amazon and Facebook, together with other large multinational companies and raise taxes that are currently going to low tax jurisdictions.
The second pillar is a global minimum tax rate, which the US proposes to be at 21%, the current US corporate tax rate. The idea behind it is that if the critical mass of countries signing up to it is reached, large companies would be unable to book their profit in countries with low corporate tax rates. The race to the bottom would be abandoned. It will be beneficial for the US Treasury, too. For US corporations the choice is unequivocal. Currently it is financially much beneficial to keep their profit in tax havens than repatriate it and pay the 21% corporate tax on it. The American proposal would halt this practise and increase US tax receipts. Global minimum tax is an integral part of the Biden administration’s plans to finance the $2.3 trillion infrastructure project, that includes building roads, bridges and ports, and provides invaluable support for the US economy and within that raw materials, including oil. The minimum tax will make it easier for the US to raise its domestics corporate tax rate to 28%. An international agreement on global tax will prevent other countries from attracting American companies with their irresistibly low corporate taxes.
The initial respond to the US proposal was positive. Even countries with low corporate taxes, Ireland, Luxembourg and the Netherlands, cautiously welcomed the idea. Although negotiations will be onerous -the major sticking point is likely to be the level of the global minimum rate- the fact the talks are ongoing is in itself a positive step towards creating a level playing field and healthier economies at the expense of companies who have been navigating with ease between low tax jurisdictions in the past decades.