Hidden in this House-approved, multi-trillion-dollar spending package is a controversial provision called Section 899. This piece of the bill has received a great deal of pushback from Wall Street and had some investors feeling shocked and dismayed. Specifically, the administration wants to address these so-called “unfair foreign taxes” on U.S. companies through the application of Section 899. Though technical in nature, this legislation may make important changes to foreign investment and taxation policies.
Section 899 gives the United States the ability to increase current levies on countries that create discriminatory fiscal policies. The increase is allowed to be no more than 5% per year, and never more than a cumulative 20%. This provision aims foreigner companies only if their countries impose taxes considered unjust toward U.S. companies. The proposal could result in an estimated revenue increase of $116 billion over a decade, according to the Joint Committee on Taxation.
In reaction to Section 899 being included in the spending bill, Wall Street has let loose with gasps of horror. James Lucier, managing director at Capital Alpha Partners, described the reaction succinctly:
“Wall Street investors are shocked by [Section] 899 and apparently did not see it coming.”
Investors are rightfully concerned that the new provision will deter foreign investments in the United States. Its provisions include increasing the U.S. withholding tax on passive investment income to a maximum of 50% – an enormous hike. Daniel Bunn, president and CEO of the Tax Foundation, emphasized the broad implications of this measure:
“Basically, all businesses that are operating in the U.S. from a foreign headquarters will face that.”
Though that concept has faced some push back from quarters on Wall Street, Section 899 has garnered strong bipartisan support and won over constituencies. As far as Republican members of the House Ways and Means Committee are concerned, it’s a big, golden top priority. The committee’s chairman, Jason Smith, argued that the provision is essential for promoting fair taxation practices globally:
“If these countries withdraw these taxes and decide to behave, we will have achieved our goal.”
As stated in the Section’s purpose, the ultimate goal of Section 899 is to force foreign governments to reconsider their tax regimes towards U.S. companies. This provision is thus a BEAT on steroids. It’s designed to stop big corporations from gaming the system by moving profits outside the U.S. to avoid paying taxes and to create a more equal field for American companies.
Section 899 risks unintentionally restricting beneficial foreign investment in the U.S. All of these issues have brought the vocal opposition of the Investment Company Institute. Their concern is that this provision will scare away foreign entities from coming to—or remaining in—the American market.
Daniel Bunn further elaborated on the potential effects of this expansive measure, stating:
“It’s pretty expansive.”
While the debate over Section 899 rages on, legislators are under growing pressure to weigh its potential consequences on Trump’s spending bill. If this controversial provision is removed, additional revenue will likely need to be identified to keep the package fiscally sound.