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Thirty years ago, when I was a rookie reporter, a veteran writer offered me sage advice: whenever presented with a government or corporate document that is more than 100 pages long, hunt for hidden bombs.
Donald Trump’s thousand-page (plus) “big, beautiful bill” is a case in point. Since the House of Representatives passed it last week, this fiscal act has been (rightly) lambasted for many reasons: it favours the rich over the poor; cruelly cuts social safety nets; and recklessly expands the debt. Even Elon Musk is upset.
But what investors should also fret about, if they care about the state of Treasuries or are a non-American entity holding US assets, is a clause buried in the bowels of this behemoth called section 899. This would enable the US Treasury to impose penalties on “applicable persons” from “discriminatory foreign countries” by increasing US federal income tax and withholding rates by up to 20 percentage points on their US investments, on a variable scale. It might thus be viewed as a novel “revenge tax” (as some lawyers call it) that Trump could use to bully friends and foes alike in trade negotiations.
So, at best, all this undermines prior efforts to build a collaborative global tax system via groups such as the OECD, with its undertaxed profits rules. At worst, it makes Trump look like a feudal European king intent on using tax as a capricious tool to extract foreign tribute. Either way, it undermines the idea that America is a place of consistent investment laws — and has shocked lawyers in countries such as Canada.
“Section 899 is toxic [and] a potential game-changer for foreign investment,” Larson Gross, a tax advisory group, told clients this week. Or as Neil Bass, a Canadian lawyer wrote in his own missive: “The US just declared a tax war and it’s targeting allies.”
George Saravelos, an analyst at Deutsche Bank, writes in a client note: “Section 899 challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals.”
So will this actually become law? The only honest answer (as with so much of Trump policymaking) is “no one knows”. Trump’s bark, after all, is often worse than his bite, and the courts sometimes rein him in, as seen with tariffs this week.
In any case, there are a host of known unknowns around section 899. The Senate might insist that this clause is watered down or removed. Or if the surcharge stays intact, there may be provisions to let affected non-American investors and companies offset this against domestic tax bills.
No one exactly knows how a “discriminatory foreign country” will be defined (although the Treasury is supposed to regularly report on that). Nor is it entirely clear what investors and companies might be hit.
At first glance, the bill only affects non-US investors and companies already subject to US tax. But, as I recently noted, the White House recently warned in an executive order that it might overturn a crucial 1984 ruling that exempted Chinese investors, among others, from a prior 30 per cent withholding tax on assets such as US Treasuries. If so, those flows might be hit by section 899 too, as analysts such as Michael McNair suggest.
Another reason for uncertainty is splits among Trump’s own advisers. I am told that some love the idea of imposing revenge taxes on foreigners, since it will play well with the Maga base — and a think-tank allied with vice-president JD Vance reckons that such taxes could raise $2tn revenue in the next decade.
And figures such as Howard Lutnick, commerce secretary, are keen to find new weapons to wield in their trade negotiations with the EU and Canada.
As the law firm Davis Polk points out, the fact that those two regions — along with the UK — impose digital services taxes could make them easy targets for section 899 measures.
But Scott Bessent, Treasury secretary, is likely to be wary of invoking section 899 since he does not want to scare global investors away from Treasuries. After all, he needs to sell oodles of US government bonds to fund the ever-expanding debt — and there are already hints of some capital flight.
Either way, the key point is that the mere presence of section 899 in this bill — whatever ultimately happens — is likely to further undermine global trust, given that it shows that the Trump team is at least entertaining the idea of turning trade wars into capital wars, in the future.
No wonder investment groups ranging from Canadian pension funds to mighty Asian institutions tell me that they are stealthily diversifying away from US assets. Or that Federal Reserve officials recently fretted about the likely damage to America’s economy if its “safe haven” investment status is undermined. As legislative bombs go, this is self-defeating. The Senate should kick it away.
gillian.tett@ft.com
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