It isn’t just Tariffs! Uncle Sam is Going After Foreign Investors Too
Former Global Chief Economist for JPMorgan Chase (Ph.D. in Economics) & Current Global Keynote Speaker
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In a year marked by legislative brinksmanship and a politically polarized Congress, the “One Big Beautiful Bill” (OBBBA) passed in the House of Representatives and is pending in the Senate, sparking intense global debate. Among its most controversial and geopolitically charged provisions is Section 899, a retaliatory tax mechanism designed to penalize foreign countries that, according to the U.S. government, impose discriminatory or extraterritorial taxes on American companies.
What is Section 899?
At its core, Section 899 targets what it labels “unfair foreign taxes” — a category that includes digital services taxes (DSTs), undertaxed profits rules (UTPRs), diverted profits taxes (DPTs), and other levies deemed discriminatory against American firms by the U.S. Treasury. Countries implementing such measures could find themselves on a blacklist published by the Treasury Department.
The countries that could be initially impacted include Canada, the UK, France, and Australia. However, in a world where the U.S. government may want to maximize foreign tax revenues, any foreign tax on U.S. companies that it deems to be “unfair” could affect countless other countries, including Argentina, Austria, Belgium, Brazil, Bulgaria, Colombia, Costa Rica, Croatia, Cyprus, the Czech Republic, Denmark, Finland, Germany, Greece, Hungary, India, Ireland, Israel, Italy, Kenya, Kyrgyzstan, Luxembourg, the Netherlands, Nepal, New Zealand, Nigeria, Norway, Pakistan, Paraguay, Poland, Portugal, Romania, Sierra Leone, Slovenia, South Korea, Spain, Sweden, Tanzania, Thailand, Tunisia, Turkey, Uganda, Uruguay, Vietnam, and Zimbabwe.
Foreign individuals, corporations, and even government investment arms from these jurisdictions would then face increased U.S. tax burdens expressed as:
A graduated increase in withholding and corporate tax rates of 5% above the statutory rate could rise by an additional 5.0% annually, up to a maximum of 20% above standard rates. This means that a country under a treaty facing a 10% tax will start in the first year at 15%, while a non-treaty country could begin at 30% plus 5% in the first year.
Expanded BEAT (Base Erosion and Anti-Abuse Tax) provisions, targeting more U.S. subsidiaries of foreign-parented groups, limiting deductions, and reducing tax credit allowances.
Mandatory reporting and withholding obligations, with a grace period ending on January 1, 2027, for financial institutions and agents who show “best efforts” compliance.
The underlying goal is clear: to utilize U.S. tax policy as a diplomatic tool, pressuring governments to eliminate what the U.S. considers protectionist or targeted taxation schemes against American firms. Of course, the U.S. will reserve the option to tax U.S. companies through tariffs to encourage them to reshore their production within our borders without facing any repercussions.
Who Stands to Benefit: U.S. Tech and Multinational Giants
Section 899 appears specifically designed to protect large U.S.-based multinationals, particularly in the technology, digital advertising, and pharmaceutical sectors, which often face challenges from DSTs and UTPRs in other countries. Among the likely beneficiaries:
Meta Platforms (Facebook/Instagram) and Alphabet (Google) have been subject to digital services taxes in France, the UK, and India, which impose levies based on local digital revenues, regardless of physical presence.
Apple and Microsoft have long faced scrutiny from European and Asian tax authorities for their use of offshore profit-shifting strategies, which often lead to diverted profits or minimal tax assessments.
Amazon, which operates localized digital marketplaces, has been subject to additional national taxes and regulatory burdens in India and certain parts of the EU.
These companies, whose business models are inherently global and often intangible, have argued for years that unilateral foreign taxes unfairly target them, under the guise of tax policy.
The Other Side: U.S. Protectionism and Global Double Standards
While Section 899 is presented as a defensive measure, critics claim it is part of a broader trend of U.S. protectionism. The U.S. already enforces several policies that foreign companies and governments view as discriminatory or exclusionary:
Huawei and ZTE: These Chinese telecom giants have been barred from the U.S. market and U.S. financial system on national security grounds, despite complaints that the bans are de facto protectionist.
The Committee on Foreign Investment in the United States (CFIUS) has increasingly blocked foreign (primarily Chinese) acquisitions of American firms, often citing national security without clear standards.
Foreign Bank Regulation: Non-U.S. banks operating in the U.S. face more stringent capital and liquidity requirements under the Dodd-Frank Act, which some argue exceed those imposed on U.S.-based competitors abroad.
State-Level Discriminatory Practices: Some U.S. states offer tax credits and procurement advantages to U.S. companies, effectively placing foreign competitors in the defense, infrastructure, and energy sectors at a competitive disadvantage.
In essence, while Section 899 may be framed as a tool for fairness, it opens the U.S. up to charges of establishing a double standard for foreign competitors.
How Will Section 899 Be Implemented?
From an operational standpoint, Section 899 imposes significant compliance burdens on U.S. banks, withholding agents, multinational corporations, and tax authorities:
Blacklist Management: The Treasury Department must continuously update and defend its list of “discriminatory taxes” and “targeted jurisdictions.” This list is likely to trigger diplomatic disputes and World Trade Organization (WTO) challenges. The good news for the U.S. is that the enforcement powers of the WTO are currently non-existent.
Withholding Enforcement: Banks and custodians will need to adjust withholding rates on dividends, interest, and other U.S.-source income to foreign persons from flagged countries. This introduces complexity, especially if beneficial ownership structures are opaque or indirect.
Expanded BEAT Oversight: IRS audit teams will need to assess whether foreign-owned U.S. companies meet new thresholds for base erosion payments, which will necessitate transfer pricing reviews, intercompany payment tracking, and disputes regarding the valuation of intangible assets.
Taxpayer Identification and Reporting: Financial institutions must create internal systems to identify applicable individuals under Section 899, necessitating new due diligence protocols and automated flagging mechanisms similar to those established by the 2010 Foreign Account Tax Compliance Act (FATCA).
Implications for Global Trade and Diplomacy
The retaliatory nature of Section 899 could lead to significant disruptions in trade and capital flows, particularly if other countries adopt mirror provisions or countermeasures. Likely outcomes include:
Erosion of OECD Cooperation: Section 899 could hurt ongoing negotiations under the OECD/G20 Inclusive Framework, particularly over Pillar One (digital tax reallocation) and Pillar Two (minimum tax rules).
Trade Wars 2.0: Countries such as France, India, and the UK — all of which have DSTs — may retaliate with tariffs or reciprocal taxes on U.S. companies and investors.
Chilling Effect on Foreign Direct Investment: Sovereign wealth funds, family offices, and institutional investors from flagged countries may reduce U.S. exposure due to the higher taxes.
The U.S. is betting that its dominance in capital markets and technology gives it enough leverage. However, emerging markets and EU countries might see this as economic coercion, which could enhance efforts to bypass the dollar-based system.
There have been numerous warnings, including our research speculating that foreigners may consider buying less of our U.S. Treasury debt. If this legislation is enacted, it could reinforce this trend by reducing the effective rates of return on U.S. Treasury securities, U.S. equities, and all other forms of U.S. investments purchased by foreigners, who will now see their returns diminished by tax rates that could increase by as much as an additional 20% above their current statutory rates.
Operational Headwinds for U.S. Financial Institutions
U.S. banks and investment firms would also encounter a trifecta of compliance challenges under Section 899:
Systems Overhaul: Institutions must upgrade their tax withholding infrastructure, beneficial ownership tracking, and jurisdictional risk scoring, all while ensuring compliance with other regimes such as FATCA, AML/KYC, and the OECD CRS.
Litigation Risk: Withholding errors or the misapplication of expanded BEAT rules could lead to litigation, regulatory scrutiny, or loss of foreign clients.
Loss of Business: Foreign capital providers may avoid U.S. financial intermediaries altogether, redirecting flows to London, Singapore, or Zurich — regions perceived as more neutral.
In summary, the cost of compliance may exceed the benefits, especially for mid-sized banks and asset managers.
Summary and Concluding Thoughts
Proponents of Section 899 acknowledge that the legislation is bold but argue it is arguably overdue in addressing the taxation inequities faced by U.S. firms abroad. However, the strategy also embodies a high-risk, high-reward approach that gambles on America’s global economic clout to impose tax discipline through threats rather than diplomacy.
Its effectiveness will depend on how carefully the Treasury wields its power—and whether the U.S. can persuade allies to change their tax structures instead of provoking them. The law’s implementation will test not only U.S. tax policy but also the durability of global cooperation in an era of resurgent economic nationalism.
As always, this legislation would grant the President broad authority to increase tax revenues from foreign sources. The White House can decide whether to interpret this legislation if it is enacted in a narrow or broader sense, as it has interpreted the 1977 International Emergency Economic Powers Act.
As always, we leave it to our readers to determine if such legislation serves our best interests or if it could push us further away from global cooperation with both our friends and foes.