How Trump's ‘revenge tax' brought the world to its knees

Telegraph

11 hours ago

When Donald Trump unveiled his 'One Big Beautiful Bill' last month, all the focus was on how the president's trillions of tax cuts might blow out America's budget bottom line.
But hidden within the bill's 1,000-plus pages was a clause that set alarm bells ringing in boardrooms at many of Britain's biggest companies.
In section 899 of the bill, Trump proposed what has become known as a 'revenge tax', which gave him a new power to punish countries that had tax regimes he didn't like.
If Britain's taxes displeased him – and they do – he could ratchet up US taxes on British companies' American operations to blood-curdling levels.
Every year, British companies would face an extra 5pc tax hit on earnings from their US operations, with the rate maxing out at 50pc.
The threat was a devastating one. British companies with big US exposure include the food giant Compass, the big pharma pair GSK and AstraZeneca, Barclays, British American Tobacco, drinks conglomerate Diageo, goods manufacturer Reckitt Benckiser and Intercontinental Hotels Group.
All are listed on the London Stock Exchange, meaning Trump's threat could have been devastating for the already beleaguered index.
The response was immediate. Business leaders and lobby groups quickly began knocking on Rachel Reeves's door, sounding the alarm and urging the Chancellor to get on the case with Scott Bessent, the US treasury secretary.
Reeves got the message. She raised the S899 tax threat with Bessent when he came to London for trade talks with the Chinese in early June.
By then, though, the bill was breezing through the House of Representatives and into the Senate, with the only change being a tweak to ensure investors in US Treasury bonds weren't affected by the 'revenge tax'.
Businesses began weighing up Plan B. All the options for coping with the revenge tax were expensive and disruptive, ranging from pulling money out of the US to beat the higher rate to scaling back US investments, or dual-listing their stock in New York. Some even considered the nuclear option of spinning off their American businesses altogether.
Fearing Trump's wrath
The public debate on S899 hasn't matched the anxiety behind closed doors. Companies were reluctant to speak out, fearing Trump's wrath.
But the clock was ticking. Trump wants his Big Beautiful Bill to become law by July 4. With less than a week to go, there was still no public sign that his team, or the Republicans in Congress, were ready to compromise.
On Thursday night, though, the tax bloodbath was averted. Bessent announced that he'd extracted surrender terms from the finance ministers of the G7 – Britain, France, Germany, Italy, Japan and Canada – and told Congress to drop section 899.
'It's a big relief,' says Emanuel Adam, a Washington-based executive director at the lobby group British American Business.
CS Venkatakrishnan, the Barclays chief, called it 'welcome progress, and a significant outcome for a great many UK companies like Barclays that invest in the US'.
But a deal with Trump always comes at a price.
The main target of s899 was efforts to impose a global minimum corporation tax, part of a OECD-led initiative, and in particular the Under-Taxed Profits Rule (UTPR). This aims to ensure that multinational companies always pay a tax rate of at least 15pc on their earnings, rather than being able to shelter profits in lower-tax countries.
Bessent says the G7 will now not impose that levy on US businesses. The risk now, observers say, is that an American exemption to the UTPR could start to unravel that whole process, sending the world back into the rabbit warren of widespread tax avoidance.
'The biggest success has been to get a load of low-tax or no-tax countries, like the Gulf states and most of the island tax havens, to up their company tax rate to 15pc,' says Tim Sarson, the head of tax policy at KPMG UK.
'If they think they can reduce that rate and attract US companies to their jurisdiction, that might start to unpick the new system more widely.'
Digital services taxes, which were one of Trump's explicit targets of s899, are still on the table. The president sees these as unfair imposts on American tech giants, but The Telegraph understands these will be fought over as part of his trade negotiations with individual countries, rather than as part of this deal.
Closer to home, there's the question of whether the s899 deal will deliver yet another blow to Reeves's already shattered Budget.
The Office for Budget Responsibility has estimated that the OECD 'Pillar Two' deal, which includes the global minimum tax rate and the UTPR, would deliver £1.3bn of extra revenue this financial year and next, climbing to £1.5bn by 2029-30.
Most of this, though, would come from a different part of Pillar Two, which targets UK companies with subsidiaries in offshore tax havens, rather than US businesses. Tax experts say revenue from the UTPR, which the UK would collect from foreign companies, would be difficult to model and likely have only a small impact on the OBR's forecast.
Price worth paying
Even if there is a hit to Britain's tax take, it may have been a price worth paying to shield Britain's corporate A-list from Trump's brutal tax.
With many blue chip companies reporting their annual or half-yearly results next month, boards were preparing and planning for the inevitable questions from alarmed shareholders.
Many were evaluating what could be done to minimise the impact in the short term, in the hope that the political weather in the US might change after the Congressional midterm elections next year and the presidential election in 2028.
'I don't think companies would have retracted their investments or stalled major plans, but it would create additional friction. Projects might have taken longer,' British American Business's Adam says.
'Companies are agile, and companies know how to adjust. But this would have consumed resources and money that could be spent on other things.'
Damage to confidence
Although the immediate crisis seems to have passed, the Trump administration may have inflicted some lingering damage on the confidence that UK companies and investors have in the US as a place to do business. It just doesn't look quite like the safe, secure and stable proposition it used to be.
Joe Dabrowski, of the Pensions and Lifetime Savings Association, says that when you add the s899 scare to the tariff threats, Trump's fight with Jerome Powell, the Federal Reserve chairman, and his radical surgery on corporate governance, the sum total is much greater uncertainty.
'It all creates an environment where investors just have to tread more carefully. There is a lot more thinking and due diligence and risk you have to factor in,' he says.
'Some of it might just be white noise and political posturing, but at times it's very difficult to tell the difference between that and reality.'
And although Reeves probably had little choice but to yield to Trump, the G7's readiness to give way has probably only increased that risk.
'There's the fear, which I'm sure UK Treasury has as well, that if you give the Americans this, then the next time they're unhappy about something, they'll try the same trick,' says KPMG's Sarson.
With the mercurial Trump barely started on his four-year term, British businesses should probably just put those contingency plans in a drawer, rather than feed them to the shredder.