Austria introducing a “One Big Beautiful Bill Act” into their legislative process has investors on edge as things continue to heat up in the U.S.A major provision, Section 899, would radically reshape the tax treatment of foreign capital in the United States. This legislation, which passed overwhelmingly in the House of Representatives a few weeks ago, still needs to be passed by the Senate before becoming law.
Section 899 further singles out entities from foreign countries that it labels as “discriminatory.” These are countries that put in place taxes—like digital services taxes—that target and discriminate against U.S. firms. This initiative is directly opposed to discriminatory taxation practices. It has the potential to chill billions of dollars in foreign investments into the U.S.
Emmanuel Cau, the new head of European Equity Strategy at Barclays, is sounding the alarm. He’s concerned that if this legislation gets passed, it would reduce the value of dollar denominated assets. Taxes on U.S.-source income may increase by five percentage points annually. If that occurs, rates could soar to nearly 20%. This prospect greatly concerns foreign investors. It worries the biggest institutional investors, like governments and central banks, that own trillions in U.S. Treasuries.
As of March, France and Germany together owned $475 billion in U.S. government bonds. Should Section 899 be enacted, these countries, along with others affected by similar digital taxation measures, might reconsider their investments in U.S. assets.
The bill poses risks for various companies operating in the U.S., such as London-listed Compass Group, which provides catering services to schools, and InterContinental Hotels, which manages numerous luxury hotels across the country. These aggressive participants in the market will find themselves with larger tax bills when the legislation runs its course if adopted as drafted.
So have big Australian pension funds with U.S. investments that have aired their fears about the bill’s ramifications. First, the changes being proposed go well beyond European actors. They would impact millions of non-U.S. persons and private sector actors.
Max Levine, the head of U.S. tax at Linklaters, made this crucial point. He emphasized that the bill would trigger an unprecedented increase in tax rates for many non-U.S. persons and entities. He said that this legislation is a true sea change in taxation policy. This shift would have a radical effect on how US businesses of all sizes operate abroad.
Perhaps the most important point on the issue was raised by George Saravelos, global head of FX research at Deutsche Bank. He noted that Section 899 undermines the open nature of U.S. capital markets. It accomplishes this by levying taxes on foreign ownership of U.S. assets, all in the name of promoting U.S. economic interests. According to Saravelos, this approach represents a “weaponization of U.S. capital markets into law.”
Beat Wittmann, chairman of Porta Advisors, called the bill “very bad.” Its consequences could poison the global investment environment. He remarked, “The ultimate judge for this is not our opinions; it’s the bond market.”
Mayer Brown’s legal experts expect the bill to be rewritten substantially as it moves through the Senate. They’ve got a hawk eye on the ground for any changes. They expressed uncertainty regarding whether provisions that override tax treaties will remain intact in the Senate’s version of the legislation.
Worries go way beyond taxes. For instance, analysts point out that the bill may trigger capital outflows from the U.S., particularly in light of the country’s strongly negative net international investment position. As one industry analyst put it, the potential for these outflows is indeed real. Unfortunately, that’s precisely what could occur if Section 899 makes its way through the Senate unscathed.