Foreign investors recoil from ‘discriminatory' tax in Trump's big bill

The Hill

a day ago

A proposal in the House version of President Trump's tax and spending cut bill that could levy a 20 percent tax on foreign investors from countries that 'discriminate' against the U.S. has foreign governments and financiers worried.
Tax experts say the rule is designed to modify a global minimum tax in a way that could make it compatible with the U.S. tax system, but foreign companies and diplomats are fretting that it could open another front in President Trump's trade war and boost the tide of economic nationalism that's now crashing over international commerce.
'If you're creating such a risk or potential uncertainty tax on businesses here, then many will think twice about investing further in the United States,' United Kingdom Ambassador to the U.S. Peter Mandelson told The Hill.
'If you've got an argument with [foreign] governments, then take it out on the governments. Don't take it out on the businesses and the individuals,' he said.
The proposed rule, known as Section 899, targets a 15 percent global minimum tax regime that was being negotiated by the Biden administration. Republicans successfully blocked that deal from being implemented in the U.S. in its current form.
While the plan specifically calls out the regime's undertaxed profits rule (UTPR) along with digital service taxes aimed at U.S. tech giants — both of which Republicans have long railed against —the language of the provision is sweeping.
Unfair foreign taxes, as designated by the legislation, include 'extraterritorial' taxes, 'discriminatory' taxes, or 'any other tax [that] will be economically borne, directly or indirectly, disproportionately by United States persons.'
'Any country could be deemed to have imposed 'extraterritorial' and/or 'discriminatory' taxes affecting U.S.-headquartered multinationals,' Alex Cobham, head of the U.K.-based Tax Justice Network, wrote in an analysis. 'U.S. multinationals systematically underpay tax by shifting profits out of most jurisdictions where they operate. … Section 899 [seeks] to exert taxing rights on profits arising locally that would otherwise be shifted out.'
For some investors, the proposed law evokes the White House's 'reciprocal' tariffs against dozens of countries that used a novel calculation and took the international trade world by storm.
'[Section 899] raises the risk of adding a capital war to the current trade war. The impact could well be notable, mostly via its impact on [foreign direct investment],' Deutsche Bank strategist Tim Baker noted in a June 5 note to investors.
Lawmakers are also thinking about Section 899 in terms of Trump's trade war.
'President Trump [is] talking about tariffs being fair in terms of reciprocity. That's all it is,' Sen. John Hoeven (R-N.D.) said Tuesday. 'What this tax does is make sure we get fair treatment.'
International business groups are warning about the impact on foreign investment in the U.S., as well as the prospect of retaliation against the tax measure by foreign countries.
In a letter to Senate leadership, the Global Business Alliance, which represents foreign companies in the U.S., said the rule risks 'prompting retaliatory action by foreign governments against U.S.-headquartered companies, further destabilizing an already fragile international tax environment.'
Section 899 would add a 5 percent tax per year on the U.S.-based income of individuals and companies from the 'discriminatory' foreign countries that levy such taxes. The surtax would top out at 20 percent.
The law appears designed to nullify the effects of the global minimum tax in its current form. The global minimum tax is also known as 'Pillar 2' and was negotiated through the Organization for Economic Cooperation and Development (OECD), a Western-led group of wealthy countries.
The Joint Committee on Taxation, Congress's in-house tax scorer, estimated that the U.S. would lose about $120 billion under that deal, while Section 899 is estimated to raise a comparable $116 billion in revenues over 10 years. That's about 0.2 percent of annual U.S. revenues.
Pillar 2's undertaxed profits rule allows U.S. subsidiaries of multinational corporations to be taxed if their parent company isn't taxed at the minimum rate of 15 percent. Digital service taxes allow foreign countries to tax companies like Facebook and Google, since their products are used abroad even though they're headquartered in the U.S.
'Several countries have already made the wise decision to exclude the UTPR surtax from their implementation of the OECD global minimum tax,' House Ways and Means Republicans warned in a January statement related to the proposal.
Tax experts say Section 899 is primarily focused on getting rid of the UTPR within Pillar 2 and making sure that countries don't start taxing tech giants for using their products.
'We've heard Treasury officials now speak publicly multiple times. [Their position] has consistently been [that] this is not about getting rid of Pillar 2. This is about getting rid of a mechanism that is essentially forcing countries to adopt an income tax,' Pat Brown, co-leader of accounting firm PwC's tax practice, told The Hill.
Brown said the broader language in the bill that's perturbing foreign investors is likely intended to be a safeguard against semantic workarounds for instituting digital service taxes and subsidiary top-up taxes — not to be a general-purpose punitive tool in an escalating trade war.
'I don't think there's something else specific on their radar. I think this is more [lawmakers' saying] 'We just need to make sure our bases are covered and somebody doesn't get cute,'' he said.
Analysts for JPMorgan speculated that the practical scope of the provision would be much smaller than a 20 percent tax on foreign direct investment in the U.S., or even 'trivial.'
'More realistically, the effect of Section 899 should be much smaller, and perhaps trivial,' they wrote in a Tuesday note to investors.
Notably, the big Republican bill does not axe the global minimum tax regime. However, there are questions about its prospects, given the inclusion of Section 899 in Republicans' big bill.
'If we look at Pillar 2 in a vacuum where the U.S. doesn't retaliate with tariffs and, say, Section 891 and proposed Section 899 … then I think Pillar 2 could definitely survive — although I think what I just said is unrealistic,' Scott Levine, former Treasury Department deputy assistant secretary for international tax affairs, said in April. 'We already know that we're not in a world without any of those measures.'
Doing away entirely with the OECD regime would likely open up a floodgate of digital service taxes against U.S. tech giants that could drown countries in bilateral trade confrontations.
European taxation and regulation of American Big Tech companies operating on their continent have been a sensitive spot for successive U.S. administrations.
Vice President Vance voiced disapproval of European tech regulations, including the EU's wide-ranging Digital Service Act, at a conference on artificial intelligence in Paris earlier this year.
'Many of our most productive tech companies are forced to deal with the EU's Digital Services Act and the massive regulations it created about taking down content and policing so-called misinformation,' he said in February.
Despite Republicans' overall maintenance of the OECD framework, some international tax groups have argued that Section 899 makes a rival framework advancing at the United Nations a more attractive option for international tax coordination.
'The negotiations of the U.N. tax convention are the best and perhaps only opportunity to act collectively against the unilateral threat posed by the Trump administration,' the Tax Justice Network's Cobham wrote.
Sarakshi Rai contributed.