US Bill Imposes Tax on Foreign Entities, Providing Trump with Retaliatory Power

A new bill in the US aims to impose a tax on foreign individuals and companies operating in the country. The provision provides President Trump with retaliatory power, potentially affecting tech giants like Meta Platforms, Inc. that operate in the US. The bill's passage would require a two-thirds majority in Congress.

A significant tax measure has been introduced in the US tax-and-spending bill, setting off alarms on Wall Street and beyond. This provision, known as Section 899 and titled "Enforcement of Remedies Against Unfair Foreign Taxes," aims to increase tax rates for individuals and companies from countries whose tax policies the US deems "discriminatory." This includes raising tax rates on passive income, such as interest and dividends, earned by investors who are potentially sitting on trillions in American assets [1].

The measure, which passed the House last week, seeks to address perceived unfair treatment of the US by the rest of the world. It targets countries imposing "digital services taxes" on large tech companies like Meta Platforms, Inc. The clause also aims at countries using provisions in a multi-country deal for minimum corporate taxes. The tax would initially boost the federal income tax rate on passive US income earned by investors and institutions based in the targeted countries by five percentage points, rising by another five points each year to a maximum of 20 points above the statutory rate [2].

Analysts fear that the provision may further drive away foreign investors at a time when their confidence in US assets has already been shaken by Trump's erratic trade policies and the nation's deteriorating fiscal accounts. Michael Brown, a strategist at Pepperstone Group, noted that the measure could be another reason for foreign investors to stay away from US assets [2].

The passage of the bill would require a two-thirds majority in Congress, a high bar to overcome. Despite the potential market impact, the measure is likely to remain in the final version of the reconciliation package, as it has broad Republican support [2].

The implications of Section 899 are significant. It could weaken the dollar and European stocks with US exposure, according to Morgan Stanley's strategists. Gilles Moec, the chief economist at AXA Group, also noted that it could add to the pressure on long-term interest rates, which have recently touched multi-year highs [2].

The market reaction to Section 899 appears muted for now, but investors are beginning to grasp its significance. With tariff revenue more uncertain and less likely to offset tax cuts in the GOP budget bill, traders need to be prepared for tax changes on foreign holders, ultimately reducing demand for American financial assets [2].

References:
[1] https://news.bgov.com/financial-accounting/obscure-tax-item-in-trumps-big-bill-stokes-wall-street-angst
[2] https://finance.yahoo.com/news/obscure-tax-item-trump-big-195608308.html