Alarm bells have been ringing regarding taxes on foreign investments in the Trump administration’s so-called One Big Beautiful Bill Act.
Section 899 of the bill states that investment into the US from “discriminatory foreign countries” in the form of interest and dividends on stocks and bonds could be taxed at a rate increasing by 5% a year up to 20%. This could apply to US Treasury holdings as well as investments in US companies, although some spokespeople for the administration have stated that it will not.
Bloomberg dubbed this a “revenge” tax in retaliation for taxes in some other administrations, including the European Union, that impact US businesses.
In a note to clients, George Saravelos, global head of foreign exchange research at Deutsche Bank, warned that Section 899 “challenges the open nature of US capital markets”. And EY warned that the provision would have “significant implications” for the asset management industry as it would impact certain cross-border income flows that are generally earned by, among others, hedge funds, private equity funds and their portfolio companies, real estate investment trusts and sovereign wealth funds.
It remains to be seen whether the section, along with the many other terms of the bill, will pass through the Senate unchanged. John Thune, the Republican majority leader in the Senate, has already said that the provision will be specifically examined to see whether it is “pro-growth”.
Bloomberg initially described Section 899 as “obscure”, but now it is being spotlit as a further disincentive for outside entities to invest in the US.
The US Congressional panel on investment has said that if enacted, it would cut foreign investment in the US. At a time when the US depends on foreign investment to sustain its deficit funding, this could have grave implications, even if it avoids direct impact on US Treasury holdings.
For one thing, the level of executive discretion in the provision has triggered fears. Moreover, the broadening of economic conflict between the US and its trading partners to embrace the capital markets is a development that has caused some to question whether the US is still committed to open market capitalism at all. And the erratic, inconsistent nature of the Trump administration’s policymaking is such that any expansion into a new area sparks unease among investors.
