Proposed 'Revenge' Tax Provision Has Global Capital Managers Worried
Fund managers and Wall Street executives say a small provision inside the Big, Beautiful Bill could crush foreign investment into the United States.
The sweeping budget and tax bill that passed the House of Representatives after days of late-night negotiations would empower the government to increase the federal tax rate on passive income earned in the U.S. by investors and companies from foreign countries that President Donald Trump’s administration deems to have “discriminatory” tax policies.
The esoteric language, found in Section 899 of the bill, would give the White House wide latitude to target specific countries for the increased taxes, which would start at 5% before ramping up to 20% over three years.
Tax policy experts have labeled the tax provision as a “revenge” measure and warned that the Trump administration could leverage it as part of its broader trade negotiations.
That prospect is already weighing on the minds of international investors who worry that passive income from their U.S. investments could become a casualty of geopolitical posturing.
The Global Business Alliance, a trade group that promotes open trade, said that Section 899 “invites a global tax war.”
“Retaliatory or discriminatory tax provisions invite global escalation,” CEO Jonathan Samford wrote in a statement. “U.S. trading partners are likely to respond with reciprocal measures, deepening tax disputes and increasing uncertainty for globally integrated businesses, including U.S.-headquartered firms.”
George Saravelos, head of foreign exchange research at Deutsche Bank, wrote in a note on Thursday that the provision would enshrine the “weaponization of US capital markets into law,” Bloomberg reported. The Senate could amend or remove the tax provision before sending the bill to Trump's desk for a signature.
“We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes,” he wrote.
The proposed tax provision defines “unfair foreign taxes” broadly and would include digital services that have been widely adopted across international jurisdictions, attorneys at Greenberg Traurig wrote in an analysis.
It also violates international law, they said. The “proposed legislation effectively overrides certain U.S. tax treaty obligations — a significant departure from longstanding treaty commitments,” the attorneys wrote.
The provisions would impact investors of all sizes, including the sovereign wealth funds, pension funds and institutional investors that frequently turn to the U.S. commercial real estate market for large capital outlays.
International investors put $21.3B into U.S. commercial real estate assets in 2024, with more than a third of that capital coming from Canadian firms, which have spent a combined $73B on U.S. real estate since 2019.
Commercial real estate is a drop in the ocean of foreign capital flowing to the U.S.
Foreign direct investment in the U.S. reached $5.5T, or 20% of the country’s gross domestic product, according to the U.S. Commerce Department. But the provision could also shake bond investors’ already-rattled confidence in U.S. Treasurys, which could drive up rates and, in turn, borrowing costs.
“If you’re now talking about massively unfavorable tax treatment, then it’s just another reason to stay away,” Michael Brown, a strategist at Pepperstone Group, told Bloomberg.
