U.S. Foreign Investment: A New Landscape under Trump’s “Revenge” Taxes
Foreign investment into the United States could be facing new challenges as President Donald Trump advocates for a set of “revenge” taxes, according to analysts. These proposed measures arise from a provision in Trump’s "One Big Beautiful Bill Act," which aims to impose higher taxes on foreign entities linked to jurisdictions that levy what the U.S. considers “unfair” taxes on American individuals and businesses.
The Mechanism of Section 899
At the heart of this legislation is Section 899, which classifies various taxes, including digital service taxes and diverted profits taxes, as unfair. These taxes are viewed as specifically targeting U.S. companies and individuals. Under this section, U.S. authorities would have the authority to impose additional taxes starting at 5%, with potential annual increases of five percentage points, capped at 20%. This structure raises concerns among foreign investors who might rethink their commitments to U.S. assets.
Implications for Foreign Investment Sentiment
Max Yoeli, a senior research fellow at Chatham House, warns that the introduction of Section 899 could alienate foreign investors. He argues that it calls into question the fundamental openness of the U.S. market, which has traditionally been a cornerstone of its investment appeal. Such a perception could deter potential investments, especially from countries already under scrutiny.
Italian bank UniCredit shares similar sentiments, noting that this proposed measure could dampen foreign investor enthusiasm for U.S. assets. If enacted, the new tax regime could backfire on the U.S., given the significant volume of domestic assets held by foreign entities.
A Broader Scope: The Countries Most Affected
The potential list of countries affected by Section 899 is extensive, encompassing many European nations such as Germany and Italy. Investors from these countries have been increasingly securing U.S. assets over the past decade, with foreign holdings more than doubling during this period. This growing interdependence makes the implications of Section 899 even more critical, as foreign investors could find their interests threatened.
A Tool for Trade Negotiations?
Beyond merely financing corporate tax reductions, Section 899 may also serve as a bargaining chip in future trade negotiations. As the Republican Party appears inclined to withdraw from the global minimum tax framework, this additional tax could be leveraged in discussions with other nations. Analysts suggest that it could effectively transform a trade conflict into a capital conflict, raising the stakes for multinational corporations and foreign investors alike.
UK Companies Under Scrutiny
UK corporations are particularly vulnerable because of existing tax frameworks like the digital services tax and diverted profits tax aimed at tech giants. Goldman Sachs identifies that companies listed on the FTSE 100 are especially exposed to Section 899, as approximately 30% of their revenues derive from U.S. operations. This dependency raises concerns that UK investors may seek to re-establish their stock market presence in New York to avoid the punitive measures of this legislation.
The Appeal of Redomiciling
With these risks in mind, the option to redomicile in New York might appeal to companies seeking to circumvent Section 899. Firms that are majority-owned by U.S. shareholders are exempt from these new taxes, creating a powerful incentive for companies to reassess their listings. Analysts suggest that aligning with U.S. investor bases not only mitigates tax risks but also enhances the strategic positioning of these companies in the lucrative U.S. market.
Targets of Section 899
Among the companies identified as significantly exposed to the risks of Section 899 are media group Pearson, business services group Experian, pest control provider Rentokil, and pharmaceutical giant Hikma. These firms, which largely pull revenue from their U.S. operations but do not have majority U.S. ownership, stand to face challenges under the new tax regime.
The European Context
French companies also find themselves at risk, as France implements its own digital services tax aimed at taxing the revenues that giants like Amazon and Google generate in the country. This creates a complicated web where fiscal policies from different nations could intersect, potentially leading to similar retaliatory taxation measures.
Conclusion
The landscape for foreign investment in the U.S. is poised for significant change. As policymakers move forward with the proposed "revenge" taxes, the implications extend far beyond tax revenues, potentially reshaping foreign investment sentiment and the strategic decisions of multinational corporations. Stakeholders will need to carefully navigate this evolving environment as these measures take shape.
