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It’s been a wild ride for Section 899.
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What changed for the foreign tax bombshell in the Big Beautiful Bill? It became clear that by retaining the existing so-called portfolio interest exemption, interest income on US debt would almost certainly remain out of scope. As such, the US Treasury market lives to fight another day. Furthermore, as Barclays’ Michael McLean explains:
Foreign investors’ capital gains (including buybacks) are considered foreign source income and, therefore, not subject to US tax. [And] … Section 899 should not make US securities uninvestable for foreign investors or cause major disruption to US equity or bond markets.
Phew.
But wait, uninvestable is quite a low bar. Despite no longer looking like a financial doomsday machine, Section 899 is still a thing. And while the US legislative process is fickle at the best of times, following Scott Bessent’s defence of it in testimony before the Ways and Means Committee it looks very much like a thing that will come into being before too long.
But, remind us, what sort of thing is Section 899? Barclays:
Section 899 would increase US tax rates by five percentage points annually (up to 20 percentage points on top of the current statutory rate) on individuals and certain entities from any “discriminatory foreign country” as defined in the legislation. Entities in scope include foreign governments (foreign government pension plans, sovereign wealth funds, and other government entities with the exception of foreign central banks), individuals who are not US citizens or tax residents, foreign corporations that are not more than 50% US owned by vote or value, and foreign private foundations.
And what, precisely, might be considered a “discriminatory foreign country”? Again, Barclays:
Section 899 defines “unfair foreign tax” to mean the undertaxed profits rule (UTPR is a mechanism for collecting top-up taxes under the OECD’s Pillar Two 15% global minimum corporate tax), digital services tax (DST), diverted profits tax, or any other tax designated by the Treasury Secretary (with nine exceptions for certain generally applicable taxes, such as value added taxes).
While it seems clear to us that “unfair foreign tax” can depend very much on the whim of the President, we’ve made a map of all the countries that have implemented the undertaxed profits rule — those identified in a February White House memo as having a digital services tax, and those with a diverted profits tax:
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Eagle-eyed readers will notice there’s one country that shows up in all three categories: our very own Blighty.
While Trump might wield his new bully stick executive powers with sufficient aplomb to bash frenemies into changing their domestic tax systems — such that it is never actually used in anger — there’s a chance that Section 899 still alters the financial landscape materially.
And while the tax doesn’t look to target capital gains on your S&P 500 tracker, it most definitely does target corporate profits generated in the US by foreign firms, or at least those based in countries deemed discriminatory by the US Treasury Department.
JPMorgan crunched the numbers in their most recent Global Markets Equity Strategy report, to get a feel for how big a deal it might be for European stocks. We’ve turned their analysis of firms that could be at risk of being impacted by Section 899 into chart. As usual, hover your mouse over the bar for details, and use the drop-down to filter by country:
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European stocks with a collective market cap of more than €630bn derive more than half of their total revenue from the US. And over €2.1tn of European market cap is tied up in stocks that derive more than a third of their income from the US. JPM calculates the basket of stocks they’ve identified has already lagged the Stoxx 600 index by around five percentage points this year, and think this could continue.
We’ve seen a lot of chat this year about how investing in European stocks is a good way to avoid US political risk. But it looks pretty much impossible to avoid US political risk.
