In an unexpected twist, legislators scrapped the damaging Section 899 tax provision included in President Donald Trump’s budget bill. This momentous ruling arrives only days before the provision was scheduled to be implemented. The point of this provision would be to raise taxes on income earned from U.S. assets. Further, this extends to people and firms who own those assets outside of the U.S. Often considered a retaliatory move against foreign country’s tax frameworks adopted in 2021, many were completely blind-sided. It was narrowly targeted at certain digital services taxes levied by foreign countries on U.S. technology companies doing business abroad.
No wonder Section 899 became known as “revenge tax.” It would do so mainly by retaliating against countries that adopt taxes considered harmful to American firms. The provision touched off a firestorm of criticism from Wall Street interests and constitutional law scholars. Many worried it would scare away foreign investment into the United States, opening the door to a more protectionist economic tone.
We were grateful that the U.S. Treasury Department and Congress responded quickly to remove Section 899. They answered the loud outcry of searing issues by global business associations and investors. Jonathan Samford, CEO of the Global Business Alliance, expressed relief over the decision, stating that the tax would have “squandered opportunity and more investment” and contributed to “further isolation” of the U.S. economy.
As legislators continued to negotiate in Washington, the possible impacts of Section 899 couldn’t be more pronounced. Observers from Citi recently pointed out that this provision could allow export tax penalties for foreign firms competing in the U.S. They claimed that this would only be the case if the companies’ countries of origin maintained a “discriminatory” tax regime.
The killing of this tax code comes in spite of strong Republican opposition, essentially acknowledging that this gave up a huge amount of precedent setting power over taxation. Senator Mike Crapo and Rep. Jason Smith, the new leaders of the congressional joint committee on taxation, are firmly committed to repealing the provision. They’re concerned it sets a bad precedent for future international trade relations.
In particular, financial analysts and municipal law firms grew concerned over the ramifications of Section 899. They were challenged by its complexity and the strict compliance requirements it held. Attorneys at Holland & Knight noted that “great concern had been expressed by Wall Street and affected stakeholders about the enactment of Section 899 and its impact on foreign investment in the United States.”
All are pleased by the call to junk Section 899. Additionally, they view it as a move in the right direction to promote a more cooperative international tax regime. Mark Luscombe, principal federal tax analyst at Wolters Kluwer, remarked, “You can try to retaliate, but it’s probably better to work out an agreement than just have a tax fight, just like we’re having tariff fights.”