In this episode of the Trade War Podcast, host Stan McCoy from the Information Technology and Innovation Foundation is joined by international tax expert Giammarco Cottani to discuss the complexities of global tax policies amidst ongoing economic conflicts, focusing on the Trump administration's aggressive tax strategy, the nuances of digital services taxes, and the implications of value-added taxes (VAT).

Mentioned

• The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal), (The White House, January 20, 2020)
• Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, (Organisation for Economic Co-operation and Development, October 2021)
• H.R.591 - Defending American Jobs and Investment Act, (119th Congress, January, 2025)
• Robert D. Atkinson, “Go to the Mattresses: It’s Time to Reset U.S.-EU Tech and Trade Relations,” (ITIF, October 2024)
• Action Plan on Base Erosion and Profit Shifting, (Organisation for Economic Co-operation and Development, July 2013)
• Jesus Mesa. “What Countries Have VAT? Map Shows Impact of Trump Reciprocal Tariffs,” (Newsweek, February 2025)
• “Value-Added Tax (VAT) is a form of TARIFF on imports,” (TorontoWealthGroup YouTube Channel, February 2025)

Auto-Transcript

Stan McCoy: Hey everyone. Stan McCoy with the Trade War Podcast, adding a quick introduction to today's episode. Just to take into consideration the big announcement that we had after the conversation with Giammarco was recorded about the new April 2nd trade policy announced by President Trump and the Rose Garden.

To me, it was a little bit of a bait and switch because we'd been told to expect an announcement that would include tariffs that took into consideration a lot of non-tariff barriers, including discriminatory taxes, like digital services taxes that we'll be talking about in a few minutes, as well as other kinds of non-tariff barriers including valu-added tax, which is something else that's gonna be covered extensively in our conversation today with Giammarco.

In fact, what we got in the US government's announcement, in President Trump's chart that he held up, was a series of purported tariffs by US trading partners that were actually numbers totally derived from the US goods trade deficits with those trading partners. So, it was a total focus on goods trade and the idea that trade deficits are bad.

Now, we can do a whole other episode sometime on the idea that trade deficits are inherently bad, or the importance of services in the US economy and intellectual property in the US economy relative to trade in goods. But all of that is just to say that the premise of the big tariff announcement that came out on April 2nd was all around trade in goods and presumably that sets the tone for a series of discussions with trading partners that would have to be focused on addressing the purported problem, which is a problem all about goods trade deficits. So how is the administration going to ultimately set about addressing these other issues? For example, issues of importance to, you know, information technology intensive sectors that don't involve a lot of trade in goods, but do involve a lot of services in IP.

We don't know the answer to that yet, but it doesn't lie as far as I can tell in the tariffs that were announced just yesterday, April 2nd. It's April 3rd as I record this. So, I wanted to set that premise and make clear to everybody just what we heard yesterday and how that impacts the great discussion we're about to have with Giammarco Cottani and without further delay, we'll get on with that.

Thanks for joining us.

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Stan McCoy: ​Hi, and welcome to another episode of the Trade War Podcast from the Information Technology and Innovation Foundation. I'm your host, Stan McCoy. I am a non-resident senior fellow with the ITIF, and this is the series where we explore the roots and realities of today's global economic conflict.

We're recording this on the 28th of March, so keep in mind that some things might have changed by the time you see this. And we're joined today by my friend Giammarco Cottani, who's an expert in international taxation for an episode that we're calling Tax Attacks. Giammarco recently founded an international tax consultancy called Noema Global after a fascinating career that's included stints working for the Italian government revenue authorities working for the OECD, and the job from which I know him most recently as director of Global Tax Policy at Netflix.

And that's where Giammarco and I first connected on some Covid era conference calls, and I discovered to my delight that Giammarco is one of those tax experts who's able to explain complicated issues to non-experts like myself. I was delighted that Giammarco agreed to come and do that service for us here on the podcast.

Giammarco, welcome. I hope your new venture is going well.

Giammarco Cottani: Stan, very nice seeing you again. Thanks so much for having me and nice to meet to the audience. I think it's a fascinating topic. I take the compliments, but you're giving me way too much credit. I'll try to make this session as entertaining as possible.

Again, thanks for having me.

Stan McCoy: We'll do our best with the subject matter. I think it seems clear that the Trump administration is determined to make tax issues, the centerpiece or a centerpiece of their aggressive tax policy plans in the announcement on reciprocal tariffs, which we're now expecting to come in place on what the administration is now taken to calling Liberation Day on the 2nd of April.

Which the president explained was not announced on the 1st of April because he didn't want to announce his big new initiative on April Fool's Day. So, Liberation Day, the 2nd of April will include these reciprocal tariffs, which on one level sound like they must be matching tariffs from other countries.

But if you look at the actual explanation of what the reciprocal tariff policy is meant to reciprocate, i t includes taxes including value added taxes and digital services taxes. And I would like to drill down into what both of those things are and why they're important. But I think at the very top level, if you look at the EU, for example, I don't see how you get to the 25% tariff that the president has talked about with just reciprocating tariff for tariff. There would have to be some kind of broader consideration of reciprocating other kinds of policies, including presumably taxes. I guess the first question to you, Giammarco, is just big picture.

What do you think of taxes becoming a battlefield in the global trade war?

Giammarco Cottani: I think I always say when people ask me about answering to this topic, there are two sides on the coin. Meaning, depending on which point of view you are going to take you can get to a different outcome. So, starting from your very good question, looking at the US I would say that the Trump administration clearly through a number of multiple memorandums play tax issues at the center of their trade strategy by, I think demonstrating an aggressive rejection of multilateralism. This is something that, in my opinion goes way beyond the technic system of tax policy, but it becomes a matter of broader issues around politics. And if you allow me before delving into the position of the Trump administration and the tax trade war, let me try at least to give my two my 2 cents reading.

When the two-pillar solution basically was presented by the G20, in this two pillar solution, for those of you who are not that acquainted, to tax matters, means reallocating taxing rights from highly successful capital exporters like the United States to market jurisdiction. The political goal was clear. From a US perspective was, let me try to rebalance the power in trade matters in order to gain in other fields, such as in the military geopolitics. I guess in a situation whereas you are, we are all aware, we are currently living a world with a number of wars. I think the most notable one is between Russia and Ukraine. Clearly on top of what is going on, of course, in Israel with Gaza and so forth. I think the United States were trying to rebalance power by gaining momentum in saying, I'm gonna surrender some of my taxable income, some of my revenues, in order to gain support from the rest of the world to push on my politically slash military agenda, including redesigning the NATO borders, so to say.

At least that's my reading. I think the United States, with the Biden administration, at least they were at the centerpiece of the two-pillar solution until the Trump administration came in. It was clear that the United States were trying in a sort of quid pro quo saying, I'm gonna put some of my taxable revenue on the table, which is currently taxing the United States in order to gain support from the rest of the world to support actually my political choices in reshaping the geopolitical global order. Now let's funnel this, tuck it down on where we are today, 28th of March, 2025.

I think there has been clearly a fracture, a rejection where we, I think at the expense of businesses, we are going to live into a world where there will be different tax systems. We are currently witnessing a segregation of tax system. At the expense of multilateralism, and I think the Trump administration has made it very clear. In fact, if you look at the January 20 memorandum that the Trump administration came up with, there was an explicit rejection of the OCED two pillar global tax deal. So, the first pillar, for those of you who are not aware, is the creation of a new taxing rights, regardless of your physical presence in favor of jurisdictions that are not as successful or as capital exporter like the United States. Pillar two is basically a project aimed at carving off cutting completely tax competition by introducing a global minimum tax of 15%, and the ultimate policy rationale of that initiative was aimed at eliminating tax as a factor to drive investment in favor of a jurisdiction rather than another.

Then I think the January 20 memorandum was quite clear where Trump basically instructed treasury to review any potential tax treaty violation and identified protective measure within 60 days. And among this protective measure we have as we will see digital service taxes, we have, in my opinion, technically and correctly even reference to VAT as a tariff, but we will discuss this later on.

But I think that the February 21st memorandum following the January 20 memorandum, escalated this approach by basically characterized the foreign tax policies. Labeled them as overseas extortion and it empowered US official to counteract digital service taxes and other tax measure that in the US view were deemed discriminatory. I found very fascinating, the January 21st Defending American Job and Investment Act, which was presented by, introduced by the US Ways and means Chair Jason Smith. Because that Act provided the US administration with powerful tools such as, for instance, the possibility of including a potential 5% annual increase in taxation on US source income from targeted countries up to a maximum 20%. So let's say if the country where I'm coming from Italy, it's deemed to be a targeted country.

that could significantly strain the relations between countries. On top of that, and this also, I found it from a tax policy geek like me, very fascinating.

There is a very interesting section on the IRC, the inland revenue code, in section 891, which was never previously enforced since its creation in 1934, which has been specifically referenced as a potential mechanism to double the tax rate on citizen and corporation from countries which again are deemed to have discriminatory practices.

So if we funnel this down, then the US administration started to considering also renew section 301 investigation against the digital service taxes of countries like Austria, India, Italy, Spain, Turkey, and the UK, as well as opening new investigation against Canada I would say the red line connecting these issues is in the US very broad definition of what is deemed to be extraterritorial tax. It is, I think, not a secret that the United States, I would say despise, I don't want to use the term hate 'cause I don't like the term hate, but despise pillar two and specifically there is a specific provision in pillar two called Undertaxed Profits Rule, which is considered to be an extraterritorial tax according to the new treasury Trump view, which is basically saying: Dear foreign country, to the extent that you're going to introduce an Undertaxed Profits Rule, because you're implementing pillar two, this introduction will essentially allow the US administration to target any country which will implement this pillar global minimum tax. So if you ask me where do we stand right now, it's funny where we stand right now because in my opinion, one of the clear elements that you're having is that we are way beyond the risk of polarization. We're beyond that. So I think we are in a situation where if countries want to survive in having a strong trade relationship with the United States, 'cause if I like, as a sport, I like box. So generally in box it is not always the boxer was the strongest punch, but sometimes is the most technical and fastest boxer that can gain a more greater likelihood of winning. Because the only way that now you have as a foreign country dealing with the US is either you build a bilateral relationship with the United States or a unilateral relationship, or otherwise you start to fight back by pushing harder.

So from a EU perspective, there has been a lot of barking, but there has not been a lot of action yet. On top of that and let me close here, I think there is also another strong power coming into play here, the into place here, which is the role of the United Nations. Because in this discussion around polarization the rest of the world, which is not the US have said, dear G20, OECD, you are not considering the possibilities for developing countries to have a voice in this debate because the developed economies such as the US have been basically taking over discussion at the OECD level. What was the response of the United States? They withdrew from the process at the UN level in order to, as the United Nations are currently proposing a framework, conventional and international tax cooperation.

So they formally withdraw and they even abstain from the G20 foreign minister's meeting. So the outcome of this trade war has been the US pre shielding itself, but closing itself. Whereas the rest of the world, in order to survive, has to decide whether to open up or to also close itself and start throwing punches at the United States?

Stan McCoy: There, there must just be an incredible sense of whiplash from these governments that were at the table with the United States in this long OECD discussion around the two pillars. You were part of that in in different ways over over quite a period of time.

And they thought they had hammered something out. And now as you said, the United States seems to despise this thing that a previous administration helped to create. how is that perceived?

Giammarco Cottani: It is a great question. I would say that I think I, on top of box, I also a lot of history, because sometimes the funny thing is that history tends to repeat itself. So if you want to understand how we got here today, we need to jump back February 2013. February 2013 was the date where the OECD presented on the mandate of the G20.

This first action plan to fight base erosion and profit shifting, which is this acronym, this famous project called BEPS. Why did we get to BEPS? We got into BEPS because the rest of the world, in the wake of the 2008 financial crisis, they were really hunger to find money to save the financial system. You might recall at the beginning of 2009, Gordon Brown, the Prime Minister of the United Kingdom had to intervene to bail out UK banks. The same happened in major European countries. So in a situation like that, the world had to look for money, and the first element to find money were let's increase tax collection. This is why at the end of 2008, 2009, first we started with the exchange of information where bank secrecy was done. And then say, okay, now that we are piercing the veil on bank secrecy, what about corporations?

Where do corporations stash their profits? And in fact I'm sure you, you might remember very well, but in 2012 there was, there were two very interesting op-eds They were published by respectively, Warren Buffet and Jeffrey Immelt. Jeffrey Immelt back then was the CEO of GE that says you know what? Our corporations pay less taxes than our secretaries. So how is that possible? Is it something that is acceptable? Is it fair? So this concept of fairness in taxation translated into the G20 say, dear OECD, start looking at how tax rules work. How multinationals are taxed. And of course, as you might know, the United States have a major role to play in this project,

They were not enthusiastic about it, but they accepted, they leaned in, and this action plan was composed of 15 action, the first one being identify the tax issues to address the digital economy, and as you all know, way better than me, I'm not American, but the major most successful digital tax player are all US companies, very successful US companies, and therefore the United States struggled in that project

it was a very fascinating project. I was back then the Italian delegate representing my country. The co-chairs of this task force were the United States with the Bob Stack, a wonderful professional from United States and Édouard Marcus, which was back then from the Ministry of Finance of France. Obviously, France wanted to tax as much as possible what the US companies were doing in Europe, whereas the United States say, Hey, hang on a second. The tax rules were just fine. Let's focus on other areas. Now fast forward to 2019. If we fast forward to 2019, then say we are making progress in the international tax system, but we didn't do much progress in taxing digital economy.

And so what do we do? And this is where as a renewed effort that came up immediately after the Trump administration was put aside and the Biden administration came in is let's push forward this two pillar solution.

So pillar one is this new taxing right that was created I am Netflix or I am any other famous tech company and an operating account without having physical presence. If pillar one would succeed, you would have to pay corporate tax on the profits, but then pillar one didn't find consensus.

So as of today, fast forward in 2025. The United States never really liked pillar one because most of the profits that would be reallocated into market jurisdiction are currently taxed in the US. the effective tax rate of a lot of US multinational right now, because of a very smart tax system that is in the US sometimes fall below 15%, and the United States position around pillar two has been at the end of the day, we do already have a minimum tax in the US So the United States now we are today, March, 2025, basically see this two pillar solution as an interference, strong interference that, that the rest of the world has towards the US and of course, the rest of the world for the lack of a better word, annoyed the US position. So what did the rest of the world thinking about, for instance, the European Union do until today they say, okay, dear United States, you are opposing to multilateralism, so how am I going to keep you on the negotiating table-- by introducing digital service taxes.

So in March, 2018, and even before the India in 2016, by the way, India has just repealed its equalization levy, which is the precursor of the digital service. European Union said let's use digital service taxes to keep the conversation ongoing with the United States and indeed with the Democratic Biden administration, an agreement was achieved that European countries said to the moment in which, where the United States will agree in signing and accepting pillar one, we will remove digital service taxes. Where are we today? We are in a world where today it is very unlikely at best that pillar one is going to succeed. Also because, and apologies if I need to be a bit technical here, but if you want to implement pillar one in the United States, you need to sign and ratify a multilateral convention. To sign a ratify multilateral convention that means the United States, you need to have the Senate, two third of the Senate, 66 senators signing and agreeing, and I don't see with the Republican administration having two third of the Senate supporting a multilateral solution,

Stan McCoy: Say again, what pillar one is meant to do in case people have lost the thread.

Giammarco Cottani: Pillar one is meant to create a new taxing which is called technically amount A, to allow countries where companies operate, regardless of whether or not they have established a company or a branch office. So regardless of the physical presence to move this tax, the taxation of the business profit of this, let's say a digital company from the country where they're resident to the country where they distribute their goods or services.

So basically in a nutshell, pillar one wanna shift taxing right from the residence country to the market country, regardless of physical presence, which is something that today, the current tax rules, if you do not have a physical presence, prevent you to do.

Stan McCoy: The heart of this problem, essentially being that the world changed, technology changed. Suddenly all of this commerce went online and you had consumers, whether they're in Italy or Germany or Japan, they're doing business online. And without the company they're doing business with, having had to have any physical presence in their country.

So maybe sometimes there's a physical presence somewhere. Maybe sometimes there's not. And there's overlaps with rules about where you locate the servers for privacy reasons and so on. I have to say that the ITIF has written a lot about these different regulatory issues mostly on the deregulatory side of the argument.

But on this, this particular issue of taxation. Old tax system not set up to capture revenues from that sort of activity in the country where the consumer is sitting. And that began to look more and more like a loophole to the different governments around the world who are sitting there watching their consumers spend that money online, but they're not capturing the tax revenue associated with those transactions.

Giammarco Cottani: To give you an example, which is gonna resonate well with both of us. So if we are a US streamer, and say you want to reach an audience in, I don't know, Saudi Arabia, or Papua New Guinea, where the, let's say US streamer do not necessarily have a need, a legitimate business need to incorporate a company, or have a branch or a rep office, still I can serve that country without being physically present. The current set of rules of international tax rules as we are dealing with it today, have been developed at the end of the 1920s, where this concept of taxable nexus required a physical presence simply because 1920s we had a brick and mortar business. But as you said, you just hit the nail in the head. Technology advances. Do you need to be physically present in a country in order to have a sustainable economic presence in that country? I don't think so.

Stan McCoy: And this sort of runs into the juggernaut now of President Trump's view of this issue of taxation, which I think was explained in a nutshell by Kate Kalutkiewicz, who was on an earlier episode of this podcast. And I think she said those are my company's to tax. That is, you have a president who very much sees that as his tax revenue and not something that he's interested in sharing with with foreign government.

Giammarco Cottani: You just go at the heart of our conversation, I think, on the tax attacks. I think we are in a fascinating, yet critical juncture of our times. I think we have been super lucky. I consider this as an optimist myself. I see the glass half-full because there is a shift in the way nowadays policy sees the word.

We are in a moment where the relevance of international organization, the relevance of multilateralism for the greater good is in danger. Anyone can like or dislike President Trump and it's not up to me to comment on that. I'm just saying where does this lead in terms of technical solution in the world of international trade?

Certainly this scenario of confrontation among major players creates tension and do not facilitate international trade. That's a fact. Is it something that is convenient? Let's look at data, right? Certainly the European Union, so the region where I'm coming from is a clear net exporter of goods. Vis-a-vis the United States. But when it comes to services in particular around digital services, I can certainly guarantee you that there is a huge trade surplus of the United States in favor of Europe. Why? Because Europe has been simply importing technology. Now, if I relate this to the declaration that have been come up by the various political leaders that have succeeded themself in the course of the last 15 years, I'm 47, so I started working when I was 24 and I just hear the same broken record when it comes to Europe. We are gonna create European players that will be able to compare and to compete with the major US dominant players in the tech world. This did, is this happened? No.

Stan McCoy: Yeah.

And there are variety of reasons why this not happen Yeah, and honestly, I think that rhetoric has become part of the problem because a lot of the rhetoric around different regulatory steps and digital services taxes too, for that matter, has really tried to partake of this anti-tech tech lash that seemed politically popular at a certain time.

But I think was also seen by a lot of Americans including inside the US government as giving away. It was the big tell that showed you that digital services taxes and the Digital Markets Act were just designed to discriminate against the Americans. And I think that's probably an unfair, broad statement about what the motivations were behind this.

But it is true that there were European politicians who explicitly attached that motivation to some of these actions in a way that probably, ultimately was not very helpful to the conversation.

Giammarco Cottani: A hundred percent. And if I can say, I think in order to give also the audience an opportunity to reflect on, it's true what you're saying, but on the other end I think that sometimes the narrative has to be objective and a little bit less biased. I can give you a concrete example with digital service taxes.

When I hear that digital service taxes as they are structured today, hit US digital companies. It is true, but today, the way they are designed, also because they're generating significant taxable revenue, they also hit a lot of European, Indian, Chinese, Australian companies that provide a similar type of service.

It is certainly true as I told you that when in their initial design the goal was, let's hit US companies, but what is actual enforcement and implementation is going way beyond that trying to consider an anecdotal evidence as I have seen it until now.

Stan McCoy: Yeah, look, can we come on to the topic of value added tax? Because this is, we've, we had a good conversation about digital services taxes,

Giammarco Cottani: Yes.

Stan McCoy: Value added tax is often a bit more of a mystery for Americans because we don't have this system. I hope our audience for this podcast is broader than just the United States, but for the benefit of those of us who are not as steeped in VAT, let's unpack what's going on in this conversation a little bit, and I'll start with, what does the Trump administration say about why VAT is unfair? we've seen Peter N. Navarro go on television on different channels in the US and answer this question, why is VAT a problem? And we'll put a link in the notes to the YouTube video a version of this episode in case people want to see what it is that Peter Navarro says when he's interviewed on this topic.

But I'll summarize it. Essentially what he says is that when the US exports a car to Europe, the Europeans slap on a VAT of 19 or 20% or more, that makes that US car that much more expensive when it's sold in the European market. But when cars get exported from Europe to the US, they get a VAT rebate on export that makes them that much less expensive when they arrive in the American market.

Navarro argues that this creates a systemic disadvantage for us producers, and he thinks that's why European cars do so much better in the United States compared to how American cars do in the European market. Now, I'll come back to whether you think that's a legitimate story or not, but I think before we go there, I need a little bit of remedial 'what is VAT?' just to help me out. My main experience with VAT is, you travel to Europe, you buy a fancy Italian leather handbag, and somehow you pay this very high 22% tax when you buy the handbag. And somehow that's a culmination of a tax that's been paid at every stage of the production of that article, every company that touched it ever since the handbag was the skin of a cow, chewing its cud in a field in Tuscany somewhere.

They've all paid and been refunded a value added tax until it got to me and I paid the 20, 22% at the consumer level and then absurdly, I get to the airport for my flight back to the US and I stand in a line only for the Italian government to hand me back the 22% that I paid on the handbags. It seems a huge amount of paperwork for no result. At the end of the day, I just need, so I just need a little remedial VAT, Giammarco please to understand what the system is about. And then let's come on to Navarro's explanation about the cars.

Giammarco Cottani: Absolutely. So thank you for this great question. Also because I'm a VAT passionate because VAT is for a tax lawyer, is the most legalistic type of tax that you can study.

Stan McCoy: It keeps you fully employed.

Giammarco Cottani: It keeps you fully employed, but it keeps you fully employed. But on top of that, why as Europeans, we do like VAT because VAT was is the only harmonized tax, meaning all the 27 EU member countries have the same system with different traits, as you will see, but this was basically one of the foundation from a tax policy perspective, that gave the opportunity to Europe to create a single free internal market.

Now, in very plain terms for the audience, as you already made some very valuable comment, a value added tax is, first of all, not an income tax. But it's a consumption tax, which is placed on the products and the services at each stage of the supply chain where the value is added. So if you want to make a comparison, because I did have the, I was lucky to live for a while in California, and so I also had quite some US friends that asked me, Giammarco, why VAT is a sales tax.

So unlike a simple sales tax. Which is only collected at the final point of sale. VAT is going to be collected incrementally throughout the production process. So you gave the example of the Italian handbag So let's try to, to break it down that example.

So you have the farmer, which is selling the cow hide, right? That the skin is gonna pay VAT. Which is called output VAT on the value added, then you will have the tannery that is gonna pay the VAT on the additional value created.

Stan McCoy: Yeah.

Giammarco Cottani: Then you will have the handbag manufacturer who's gonna pay VAT on the value addition.

And then you will have the retailer that when is gonna sell to your wife or to you is gonna pay VAT on the markup on the price. So basically what happens in the farmer, the tannery. The handbag and the retailer, each of these business in the supply chain, they will get a credit, which is called input VAT.

For the VAT that they already paid on the input used for the production. So this means, and this is where the name comes from, VAT. So they will only pay tax on the value they add at each stage of the production. So who is the person who is financially going to bear the full cost. So let's say in the example of Italy, 22% VAT, the consumer will ultimately bear, so you or your wife, the full 22% VAT, which is why you are going to get a refund when you are in Rome airport or Milan airport or Florence Airport because you are a non EU resident taking the goods out of the EU.

Stan McCoy: But EU residents, they don't get that money back. They pay the whole 22%, right? When they buy the fancy handbag,

Giammarco Cottani: Correct. That's correct. So why in a tax system VAT, and not just in Europe, but there are a number of other countries around the world, which is the vast majority of them. This is why between the two of us, it's a mystery to me why the US hasn't arrived there. But it's another discussion for another podcast.

But VAT is popular for a number of reasons. First of all, it's much harder to evade than income taxes because with VAT you have a paper trail, which has been basically justified by the supply chain of the production. It creates significant revenue specifically because, again, from a demographics perspective, Europe is getting older, so people thanks God live longer.

They do less children. So at the moment in Europe and using the example of Europe, you have much more consumption than production and creation of income. Okay. So it's considered relatively efficient from an economic stand taxation also because you are shifting taxation toward consumption rather than production. I don't know. I tried to make it as simple as possible, I hope it was.

Stan McCoy: But yeah, but two things. One doesn't the economy need consumption in order to run? And two, isn't this really regressive? Poor people need to spend money on things at the store and and it, so they pay a lot of consumption taxes relative to their income.

Giammarco Cottani: A hundred percent, but sometimes in your example, you will not have the same 22% rate because it also depend from the type of product or the type of service that you're going to buy. For example,you're in need of, let's say, dental care, or if you're in need of certain type, you want to buy food. And I would to try to consider that there would be a reduced rate compared to, let's say if you go and walk and you want to buy an expensive again later back.

Stan McCoy: Okay, now let's come back to Peter Navarro and his story about the competition between US cars exported to Europe, that then gets subjected to high VAT and the European cars that come into the US having just gotten their VAT refunded. How do you see that? Is that a legitimate trade issue?

Giammarco Cottani: I believe that Mr. Navarro's argument is technically very misleading tech. And again, I'm talking about technically because while his description of how VAT works is superficially accurate, in my opinion, it misrepresents the economic impact on a number of factors. First of all. Border tax adjustment are just compliant with the World Trade Organization, meaning that getting a VAT rebate on export is a standard feature of destination based consumption taxes. And this has been always considered compliant with WTO rules. Now, whether or not the United States and this administration like WTO rules is a different story. I believe that VAT is technically neutral, so it does not create neither an advantage nor a disadvantage because number one, imported goods such as cars face the same VAT as domestically produced goods and exported goods in either system, they don't carry VAT.

So there is not a trade advantage. To the example of Mr. Navarro, it's an also an issue of systemic balance, right? So if a European car manufacturer, so BMW to mention one or any other Mercedes-Benz or Stellantis group mentioning or Ferrari, okay? Being an Italian if a European car manufacturer exports to the US, they get a VAT rebate in Europe. So they remove the European consumption tax, they pay no US VAT because the US do not have one. And they may pay US sales tax just at the final sale, just like US manufacturers. The arguments that use that in my opinion, that there can be maybe to Mr. Navarro's argument, there can be other factors in my personal view that can explain trading imbalances, for instance. Currency fluctuation consumer preferences, non tariff barriers or product positioning that can better explain automotive trade patterns rather than VAT differences. I believe that the actual disadvantage that Mr. Navarro might be picking up on that is that the United States relies heavily on corporate income taxes rather than VAT. So corporate taxes are applied to exports. So if I am exporting, I do pay corporate tax while VAT is not applied on export. But this is a US policy choice. It's a pure US policy choice. So saying that this is an unfair treatment by other countries, I. It's, in my opinion a little bit too far reaching.

And, also, just a final remark on this point is I see at the moment very limited room for compromise with other countries specific on VAT because most countries tax system generate a whole lot of revenue by VAT is compliant with WTO rules that a lot of countries around the world tend to comply with. And again. This is not a trade issue, but this is a domestic US tax policy choice.

Then we discuss about sales tax versus VAT. But those argument when I heard them and I heard them a couple of times left me a little bit puzzled.

A lot of people are puzzled by a lot of things these days myself included. But thanks to you, Giammarco. I'm now a little bit less puzzled about the tax issues. At least I'm not sure that I understand the, how the justification is operating in the mind of Peter Navarro when he sees this situation as unfair, but at least I feel like I understand a little bit better now, the underlying mechanics You're very kind, but trust me. These are not a very I would say low hanging fruit in terms of understanding, For the sake of the US audience, that I'm sure is very knowledgeable, but sometimes rightly they might have their question, why?

So why VAT is different from a US state sales tax? Number one, it's because there is a major difference in the collection methodology because in sales tax in the US you collect them only once at the final point of sale. While as we explain VAT is collected at each stage of the production. Another thing that I personally like of sales tax is that sales tax in the US is clearly visible to the consumers as a separate line item, whereas often, depending on the choice of the company or the business, VAT is typically might be built into the price.

By the way, why I think that VAT would make more sense in the US than a US state sales tax because with sales tax in the US, business can sometimes end up paying tax on input that already include tax in the US while you avoid this double counting with VAT through the mechanism of input credit. And another major difference is that US sales taxes are typically lower. So you are around four to 10% than VAT rates because in the vast majority in the countries around the world, but on average you have between 15% and 25%.

So there are quite some material differences also, because last point VAT can create a paper trail.

So a lot. So businesses have to document both their input and output that otherwise they have a problem.

Stan McCoy: Yeah. A lot of paperwork.

Giammarco Cottani: A lot of paperwork. Yes. Then now you can digitalize.

Stan McCoy: Yeah. And a and good for tax experts like yourself.

Giammarco Cottani: The more we don't need to keep paper trail, the better it is, especially for a distracted person like me.

Stan McCoy: Look, this has been very helpful, Giammarco, and you've been generous with your time. I appreciate you helping us to navigate the suddenly white-hot tax issues at the center of US trade policy. And I would say global trade policy at this point since everyone is going to be feeling the effects of whatever comes to us on the 2nd of April.

So, we'll stay tuned for that and we will be well informed about the tax aspects of it, thanks to your tutelage.

Giammarco Cottani: Thank you very much for having me. I wish you, I will certainly listen to your podcast with a lot of attention and good luck with the remaining episodes and stay tuned, indeed.

Stan McCoy: Thank you very much. It's been a pleasure.

Giammarco Cottani: Same here.