Section 899 may raise US tax on foreign passive income if home countries impose “unfair” levies
A tax proposal in the US House-approved spending bill could impose up to a 20 percent levy on foreign investors—including Canadian funds—if their home countries apply “unfair foreign taxes” on US companies, according to CNBC.
Section 899, part of the House legislation now under Senate review, outlines retaliatory tax measures on foreign entities operating in the US.
As per the bill, the provision defines “unfair foreign taxes” to include digital services taxes, diverted profits taxes, and the undertaxed profits rule tied to the global minimum tax negotiated under the Biden administration.
It would raise tax rates by 5 percent per year, capped at 20 percent, and exclude US Treasuries and portfolio interest.
According to a June 2 analysis from Ernst & Young, the measure could have “significant implications for the asset management industry,” including cross-border income from hedge funds and private equity firms.
The firm also noted that passive investment income could face a US withholding tax of up to 50 percent in certain cases.
As reported by the Investment Company Institute on May 30, the provision is “written in a manner that could limit foreign investment to the US.”
Capital Alpha Partners managing director James Lucier said in a June 5 analysis that “Wall Street investors are shocked by [Section] 899 and apparently did not see it coming.”
The bill’s language has prompted some to call it a “revenge tax.”
Daniel Bunn, president and CEO of the Tax Foundation, described the scope as “pretty expansive,” stating that “all businesses that are operating in the US from a foreign headquarters will face that.”
His analysis warned that the provision could affect most wealthy countries from which the US receives direct foreign investment, which could pose risks to the US economy.
The second part of Section 899 would expand the base erosion and anti-abuse tax (BEAT), which aims to deter corporations from shifting profits abroad.
House Ways and Means Committee Chair Jason Smith first proposed the idea in a May 2023 bill.
According to the Joint Committee on Taxation, Section 899 could generate an estimated US$116bn over 10 years.
As per Lucier, the measure remains a “strong priority” for Republican committee members and has “strong support” from some in the business community.
However, Bunn said that if lawmakers remove the provision, they may need to find other revenue sources to support Trump’s multi-trillion-dollar bill.
He also noted that some Republicans may want to use the measure to prompt changes in foreign tax policy.
“If these countries withdraw these taxes and decide to behave, we will have achieved our goal,” Smith said on June 4.
