Worries over US 'retaliatory tax' on foreigners exaggerated - Barclays

The section of Donald Trump's budget bill that provides for the possibility of raising taxes for individuals and companies from countries with «discriminatory» tax policies is unlikely to destabilize the U.S. bond and stock markets, according to a Barclays analyst. However, Wall Street is still concerned that the new law could scare away foreign investors and cause capital outflows at a bad time for the U.S. stock market.

«Section 899 should not make U.S. securities unsuitable for foreign investors or cause major disruptions in U.S. equity or bond markets,» Barclays government regulation analyst Michael McLean said in a note that is cited Bloomberg. 

According to the analyst, the additional fees will not affect interest income or capital gains for foreign investors from U.S. government bonds or corporate bonds. He emphasizes that Section 899 of Trump's bill, which the financial community calls the «retaliation tax» (revenge tax), does not eliminate the existing portfolio investment exemption, which allows foreign investors to earn interest without paying withholding tax.

Nevertheless, McLean warned: the new norm may noticeably increase the tax burden on the U.S. divisions of foreign corporations. The analyst believes that the «retaliatory tax» is likely to be included in the final version of Trump's agreed «big and beautiful» bill. At the same time, the Senate may make technical clarifications and postpone the entry into force of the norm until 2027, says the Barclays expert.

«Retaliatory tax» is the name given to Section 899  of Trump's budget bill, which has already passed the House of Representatives and is being considered in the Senate. The section would raise taxes on income from U.S. assets - such as dividends, interest, royalties and profits - on foreign companies and investors from countries the U.S. deems to have «discriminatory» tax policies. The tax would increase by five percentage points initially, and then increase by the same amount each year until it reaches a ceiling of 20 points above the statutory rate. 

Specific countries are not named in the text, but implied are Canada, the UK and France, among others, which have so-called digital revenue taxes on global IT giants like Meta and Amazon, as well as states that have implemented a global minimum tax - including EU countries, Japan, South Korea and Australia, writes Bloomberg.

The White House believes that such a tax is needed to restore fairness to American companies, notes Bloomberg. The measure could generate $116 billion in revenue for the state budget over 10 years, according to data from the Congressional Joint Tax Committee. However, Wall Street is concerned that the tax could scare away foreign investors and increase capital outflows just at a time when their confidence in U.S. markets has already been undermined by the Trump administration's trade policies, Bloomberg writes. Most analysts do suggest that current tax breaks for non-residents - particularly the interest income tax exemption - will remain in place. But they call for more clarity on that point in Section 899 itself, as well as whether foreign central banks will be subject to the new tax.