In a bid to retaliate against foreign legislation such as digital services taxes, the U.S. wants to tax these countries’ individual and corporate equity investments in the United States, including stock market holdings and corporate ownership.Anna Moneymaker/Getty Images
U.S. President Donald Trump’s proposal to tax foreign investment from countries he believes have “unfair foreign taxes,” including Canada, is transforming his trade war into a capital war – and even conservative-leaning Americans are pushing back.
In a report this week, the American Enterprise Institute put it plainly: “We should be worried about Section 899,” referring to the section of Mr. Trump’s budget bill that proposes the foreign-investment tax.
The fear, said Kyle Pomerleau, one of the report’s authors, is that if countries do not back down by scrapping their digital services taxes and other levies, “we just get this cycle where cross-border investment just falls and falls.”
To date, most debate around Mr. Trump’s budget, called the One Big Beautiful Bill Act (OBBB), has been dominated by spending concerns. The U.S. has run a deficit since 2001 and the bill is projected to add US$2.4-trillion more debt than is already projected, sending the country’s annual deficit to nearly US$3-trillion by 2035. On Tuesday, Elon Musk decried the bill as a “disgusting abomination.”
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Yet the budget also includes a proposal, Section 899, that will penalize countries the White House considers to have unfair taxes, such as digital services taxes (DST) and the undertaxed profits rule (UTPR).
To retaliate, the U.S. wants to tax these countries’ individual and corporate equity investments in the United States, including stock market holdings and corporate ownership (but not short-term capital gains or interest earned on U.S. Treasury bonds).
The proposal is still working its way through the Senate, but if Section 899 stays as is, Canadians who hold U.S. stocks and Canadian pension funds that own investment stakes in U.S. entities will be taxed on certain elements of their investments, such as dividends. The tax starts at 5 percentage points above existing levels and rises to 20 percentage points over time.
At the moment, Section 899 is so broad that it is impossible to estimate the consequences. However, the Tax Foundation – a Washington-based think tank – said it could affect countries comprising more than 80 per cent of all foreign direct investment into the United States, including Canada, France and the United Kingdom. Tax experts at U.S.-based consultants Alvarez & Marsal have estimated that more than US$500-billion worth of foreign income could face tax increases.
“Both the threat and possible use of these measures can cause significant economic harm to the American economy,” the Tax Foundation wrote in a report.
Bankers, traders and foreign governments are only just coming to grips with the proposal. In a note to clients last week, Deutsche Bank foreign-exchange strategist George Saravelos, who is based in London, referred to the proposal as the “weaponization of U.S. capital markets.”
That sentiment was echoed by experts at Alvarez & Marsal, who wrote in a note Monday that Section 899 uses “the U.S. tax system as a diplomatic weapon.”
The prospect of a retaliatory capital tax has been batted around the Republican-led U.S. House of Representatives for a few years, but only became a real possibility after Mr. Trump’s re-election.
The irony, however, is that Republicans in the House of Representatives designed Section 899 partly to retaliate against taxes they viewed as tariffs, particularly digital services taxes.
Historically, a manufacturing company that wanted to sell goods in Canada either had to set up a plant here and pay corporate income tax, or produce elsewhere and have a tariff slapped on their goods in Canada.
In a modern economy, digital services offered by companies such as Meta Platforms Inc., which owns Facebook and Instagram, can be “produced” in the United States and “sold” here, but companies never become subject to Canadian income tax. Many digital companies engage in corporate tax planning that shifts revenue around the world to lower their tax burden.
To counter this, Canada and multiple European countries implemented DSTs as a way of taxing services that are, in theory, shipped to Canada.
While Mr. Trump loves tariffs – and has gone so far as to call himself a Tariff Man – the White House appears to back Section 899 because it dovetails with the President’s belief that the U.S. has been treated unfairly, something Commerce Secretary Howard Lutnick says repeatedly.
While Section 899 would affect all sorts of foreign investors, including non-U.S. governments, individuals, corporations, private foundations, trusts and partnerships, “so far, neither the administration nor the Senate has distanced itself from the tax despite the controversy surrounding it,” research analysts at Piper Sandler wrote in a note to clients Thursday. “However, if pushback continues to grow and there is further concern about it in financial markets, it is possible the Senate will be pushed to make changes.”
“At this point,” they added, “it appears likely Section 899 will become law though perhaps after some modest changes in the Senate.”
Editor’s note: An earlier version of this article incorrectly indicated that the proposed tax rate on certain elements of Canadian investments in U.S. entities would be 5 per cent to 20 per cent. In fact, the tax starts at 5 percentage points above existing levels and rises to 20 percentage points over time. The article also previously referred to Section 899 of the proposed legislation as Section 889 in some instances. This version has been corrected.