UNITED STATES MIGHT WITHHOLD $255 MN IN AID TO PAKISTAN
When Pakistani forces freed a CanadianAmerican family this fall held captive by militants, they also captured one of the abductors. United States officials saw a potential windfall: He was a member of the Taliban-linked Haqqani network who could perhaps provide valuable information about at least one other American hostage.
The Americans demanded access to the man, but Pakistani officials rejected those requests, the latest disagreement in the increasingly dysfunctional relationship between the countries. Now, the Trump administration is strongly considering whether to withhold $255 million in aid that it had delayed sending to Islamabad, according to American officials, as a show of dissatisfaction with Pakistan’s broader intransigence toward confronting the terrorist networks that operate there.
The administration’s internal debate over whether to deny Pakistan the money is a test of whether President Trump will deliver on his threat to punish Islamabad for failing to cooperate on counterterrorism operations. Relations between the United States and Pakistan, long vital for both, have chilled steadily since the president declared over the summer that Pakistan “gives safe haven to agents of chaos, violence and terror.”
The United States, which has provided Pakistan more than $33 billion in aid since 2002, said in August that it was withholding the $255 million until Pakistan did more to crack down on internal terrorist groups. Senior administration officials met this month to decide what to do about the money, and American officials said a final decision could be made in the coming weeks.
The officials, who spoke on the condition of anonymity to describe the sensitive discussions, did not detail what conditions Pakistan would have to meet to receive the aid. It was not clear how the United States found out about the militant’s arrest, but an American drone had been monitoring the kidnappers as they moved deeper into Pakistan.
Caitlan Coleman, an American, and her Canadian husband, Joshua Boyle, were freed along with their children in an October raid after five years in captivity. Pakistani troops confronted Haqqani militants as they ferried the family across the tribal lands of northwest Pakistan.
The Trump administration has foreshadowed a cutoff in recent days with harsher language. Last week, in announcing his national security strategy, Trump again singled out Pakistan for criticism. “We make massive payments every year to Pakistan,” he said. “They have to help.”
Vice President Mike Pence reinforced that message in a visit to Afghanistan just before Christmas, telling cheering American troops that “President Trump has put Pakistan on notice.” The reaction of his audience was notable, analysts said, since the Pentagon has historically been one of Pakistan’s defenders in Washington because of its longstanding ties to the Pakistani military.
Pakistan, however, has few friends in Trump’s National Security Council. Lt Gen HR McMaster, the national security adviser, served in Afghanistan, where he saw firsthand how Pakistan meddled in its neighbour’s affairs. Lisa Curtis, the council’s senior director for South and Central Asia, brought critical views about Pakistan from her previous post at the conservative Heritage Foundation.
In a report she wrote in February with Husain Haqqani, Pakistan’s former ambassador to Washington, the two called for the administration to “avoid viewing and portraying Pakistan as an ally.” If Pakistan did not take steps to show its commitment to America’s counterterrorism goals, they wrote, Trump should strip it of its status as a major non-NATO ally.
Such a step would be more punitive than withholding the $255 million in State Department assistance known as Foreign Military Financing, Haqqani said in an interview, because it would deprive Pakistan of access to military equipment. He said Pakistani officials were bracing for some kind of aid cutoff.
Pakistan’s military, he said, still views its accommodation of the Haqqani network as in its security interest. To overcome that, the Trump administration would have to pursue other, more punishing measures, either by imposing targeted sanctions on the government or removing it from the list of non-NATO allies.
“Pakistan can withstand a cutoff in American aid,” Haqqani said. “It would have to be followed by something else to make Pakistan believe that Trump means business.”
In July, the Pentagon said it would withhold $50 million in military reimbursements for Pakistan because the country had not taken “sufficient action” against the Haqqani network.
A State Department official said Pakistan’s actions will ultimately determine the course of “security assistance in the future.” The official said conversations with Pakistan are continuing and declined to provide further comment.
The Pakistani government did not respond to a message seeking comment.
After Coleman, Boyle and their children were freed, the Pakistani military made no mention of the captured Haqqani operative. Instead, the military released a statement saying the operation’s “success underscores the importance of timely intelligence sharing and Pakistan’s continued commitment towards fighting this menace through cooperation between two forces against a common enemy.”
Trump said it was “a positive moment for our country’s relationship with Pakistan.”
American officials are eager to learn what the militant knows about Kevin King, an American university professor who was kidnapped along with Timothy Weeks, an Australian citizen, in August 2016. King is believed to be alive but ill and American officials are hopeful that he and Weeks might be released.
Another American, Paul Overby, vanished in 2014 in Afghanistan. Overby was trying to interview the leader of the Haqqani network when he disappeared.
Gen Joseph L Votel, the head of the Pentagon’s Central Command, which oversees Pakistan and Afghanistan, declined to provide any details on the Haqqani operative who was seized other than to say he was “probably pretty important” and that any militants involved in hostage-taking were “significant.”
General Votel would not say whether the Trump administration is considering withholding aid from Pakistan to prod Islamabad to improve its counterterrorism cooperation.
“What we’re trying to do is to talk to Pakistan about this, and not try to communicate with them through public messaging,” General Votel said in an interview. A provision in the new tax law, intended to prevent American companies from shifting profits abroad to benefit from a lower overseas rate, might also hit the largest foreign banks with significant US operations.
Under the Base Erosion and Anti-Abuse Tax, commonly called BEAT, payments made by US businesses to related companies abroad must be counted when calculating global tax liability. The law doesn’t say whether the payments are counted on a gross or net basis, said Gavin Ekins of the Tax Foundation, a policy group. Because global banks frequently move money among units, a gross basis requirement would amplify their income for the calculation.
Credit Suisse Group said last week that BEAT may increase its US tax liability, while Barclays said on Wednesday that the provision might reduce the benefit of the lowered corporate tax rate. Both companies referred to uncertainties in how the clause will eventually be implemented. The US Treasury might provide guidance that eliminates the BEAT disadvantage for banks, Ekins said.
“I can’t imagine Congress really wanted to punish big banks with this provision,” said Ekins, a research economist who has studied the international aspects of the tax bill. “Global banks have hundreds of subsidiaries around the world borrowing from each other as well as lending to each other. On a gross basis, all the money going out of the US would be captured while the money coming in would be ignored.”
The tax overhaul signed into law on December 22 by President Donald Trump contains a raft of new rules, including a cut in the corporate tax rate to 21 per cent from 35 per cent and reductions in individual levies across the board. It also switched to a system in which non-US earnings are taxed at a lower rate, necessitating the global calculation.
While the BEAT provision would exaggerate US income for foreign banks, the impact on US firms won’t be as significant because most of their income is domestic and would be taxed under the regular corporate rate set by the new law, Ekins said. The BEAT will initially be 6 per cent for banks, one percentage point higher than for non-financial firms.
Mark Leeds, a tax attorney with Mayer Brown, said nonUS firms face the threat of double taxation. Foreign banks typically have subsidiaries incorporated in the US and registered branches that are an extension of the parent. Under BEAT, payments between subsidiaries and branches are counted as money going from the US unit to the foreign affiliate. The branches and the units already pay domestic taxes, so the new law means the firm could pay twice on the same income.
“The base-erosion provision might end up increasing a foreign bank’s effective rate above the statutory rate,” Leeds said. “That’s not supposed to happen. The goal is to make sure the effective rate doesn’t go too far below the statutory rate, but exceeding it is absurd.”
The Institute of International Bankers, a group lobbying on behalf of foreign banks with US operations, expects BEAT calculations to be made on a gross basis, and urged Congress earlier this month to fix these issues before the law was finalised. Some tweaks were made, but the bill is still flawed, IIB chief Sally Miller said in an emailed statement Thursday.
BEAT “could more than offset any savings that result from the corporate tax rate being lowered,” Miller said. She said the IIB will work with Congress and the Treasury on a possible correction. Congress routinely passes “technical corrections” bills that revise details of recent laws.
One of the changes Congress made at the last minute based on banks’ objections was to exempt derivatives from BEAT considerations. But even that exemption is too narrowly written and will end up catching many derivative transactions between affiliates of global banks, Mayer Brown’s Leeds said.
UBS Group, HSBC Holdings and Deutsche Bank declined to comment on the potential impact of BEAT on their tax bills.
Goldman Sachs Group, meanwhile, said the US tax reform will cut profit this year by about $5 billion. Goldman Sachs, which gets more than 40 per cent of its revenue outside the US, had $31.2 billion in earnings reinvested abroad as of the end of 2016, according to a regulatory filing.