Trump's "Revenge Tax" Proposal Sparks Fears of Capital War

Strategic Insights -

The possibility of a "Mar-a-Lago" accord to depreciate the dollar has been put on hold, but a new development is rekindling concerns about a capital war. The Trump administration's draft budget, passed by the House and being debated in the Senate, includes a provision that could trigger a new sell-off in US capital markets. Section 899 of the bill allows the US Treasury Department to impose an additional staggered tax of 5-20 percentage points on investment income on US assets from countries that implement "unfair" tax policies.

The tax on dividends can reach 50 per cent, and income subject to additional tax under Section 899 includes interest, dividends, rents, royalties, business profits, and certain capital gains. Taxable investors include foreign companies and their subsidiaries, foreign partnerships, foreign private foundations and individuals, and foreign governments. The intent of Section 899 is to retaliate against countries that impose excessive taxes on US corporations, mainly the global minimum tax of 15 per cent provided for by the OECD Global Tax Agreement of 2021.

The OECD Agreement aims to reduce the incentives for companies to avoid taxation by shifting their profits to low-tax countries. Eight countries have already imposed the Digital Services Tax (DST), and six others, including Germany, have announced their intention to do so. Greece is an exception so far. The Senate version of the bill seeks to delay implementation of the "revenge tax" to 2027 and reduce the incremental tax to a maximum of 15 per cent from 20 per cent.

Key Takeaways:

  • The Trump administration's draft budget includes a provision that could trigger a new sell-off in US capital markets.
  • Section 899 allows the US Treasury Department to impose an additional staggered tax of 5-20 percentage points on investment income on US assets from countries that implement "unfair" tax policies.
  • The tax on dividends can reach 50 per cent, and income subject to additional tax under Section 899 includes interest, dividends, rents, royalties, business profits, and certain capital gains.
  • Taxable investors include foreign companies and their subsidiaries, foreign partnerships, foreign private foundations and individuals, and foreign governments.
  • The intent of Section 899 is to retaliate against countries that impose excessive taxes on US corporations, mainly the global minimum tax of 15 per cent provided for by the OECD Global Tax Agreement of 2021.
  • Eight countries have already imposed the Digital Services Tax (DST), and six others, including Germany, have announced their intention to do so.
  • The Senate version of the bill seeks to delay implementation of the "revenge tax" to 2027 and reduce the incremental tax to a maximum of 15 per cent from 20 per cent.
  • The provision is likely to harm America itself in the first instance, driving capital elsewhere and antagonizing allies.
  • The resulting drop in corporate investment and retreat from US assets would negatively impact economic growth, employment, and ultimately the revenues received by the US government.

Statistics:

  • The tax on dividends can reach 50 per cent.
  • Eight countries have already imposed the Digital Services Tax (DST).
  • Six countries, including Germany, have announced their intention to impose the DST.
  • The Senate version of the bill seeks to delay implementation of the "revenge tax" to 2027.
  • The incremental tax can reach 20 per cent.

Sources:

  • "The Global Role of the Dollar After the Tramp Tariffs"
  • "One Big Beautiful Bill"
  • "OECD Global Tax Agreement of 2021"
  • Blog of the Cyprus Economic Society
  • "Center for Liberal Studies (KEFiM)"