Section 899: A big, beautiful source of uncertainty for foreign investors?

As markets digest and speculate about the implications of the Trump administration’s 1,000+ page One Big Beautiful Bill Act (OBBBA), new details are beginning to emerge. Technically a budget reconciliation bill, it was given the all-clear from the House of Representatives some days ago and is now making its way through the Senate. Some of its main points include:

•  Extension of 2017 Tax Cuts and Jobs Act, including lower corporate and personal tax rates.
• Spending cuts focused on non-military discretionary programs, notably Medicaid and others.
• New revenue measures which include tariffs and potentially broader foreign income taxation (via Section 899).
• In reconciliation format, which enables passage with a simple Senate majority, bypassing filibuster.

Initially, market attention was focused on the extension of the 2017 Tax Cuts and Jobs Act (offset with cuts to non-military programmes such as Medicaid), and the net impact of these on the future funding needs of the US Treasury. Though these concerns remain, one of the details that has caught investors’ attention is “Section 899”.

In a nutshell, in its current form, Section 899 would allow the US government to impose taxes on foreign companies operating in the US if their home country is deemed to have an “unfair tax system”. Items under the scope of this provision include not only corporate earnings but also interest, dividends, and property disposal gains from sales. The implementation would be done gradually, with affected companies seeing their tax rate increase by 5% per year for four years, resulting in a 20% tax increase on top of the 21% corporate tax rate.

Implications could be far-reaching, but for the time being there are two main areas of concern.

First, the European Union (EU), the UK and many other US trading partners would automatically fall into the “unfair tax system” category as a result of their use of the undertaxed profit rule (UTPR), which essentially allows a country to increase taxes on a business if its parent company pays less than the OECD’s proposed global minimum tax of 15% in another jurisdiction. This is an important feature of the OECD’s global tax deal, and therefore many OECD countries have either implemented it or are planning to do so. Countries with digital services taxes also fall into the “unfair tax system” category, which adds a few countries to the list. The implication is that, as an example, entities of Barclays PLC that carry out business in the US could see their corporate tax rate effectively double in the next four years. The US government would have the power to impose a tariff of sorts to services companies via penalising cross-border activity (even if not accounted for as imports) based on foreign jurisdiction rules, which would take the trade war to a whole new level.

At face value, services trade is smaller than goods trade. However, GDP accounting is not the simplest of matters. As we understand it, and to continue with the same example, activities carried out by Barclays US Consumer Bank (a US entity owned by Barclays PLC through several legal entities) are not counted as services imports from a US GDP perspective. Barclays US Consumer Bank is a US-regulated entity providing services to US nationals, and therefore the services they provide are counted as personal consumption expenditures. Under Section 899, the profits of Barclays’ US operations would ultimately see their tax rate double.

Though it is difficult to estimate the macro impact as services trade is not a good guide, it is fair to say that if Section 899 is introduced, the consequences are likely to be significant. Foreign direct investment could take a hit as foreign companies would find it less attractive to operate in the US or acquire US companies as a way into the market. We also anticipate there would be retaliation that would hurt the foreign subsidiaries of US services firms such as JP Morgan and Google in the rest of the world.

The second area of concern is that Section 899 would apply not just to corporations but to individuals, government-controlled entities such as sovereign wealth funds and pensions funds, and partnerships. In theory, a UK national or a UK-based pension fund buying US Treasury (UST) bonds could be subject to the same rules as the companies mentioned in the previous paragraph. Currently, the reason these investors do not have to pay tax on their UST coupons is that certain types of income are excluded from a 30% withholding tax that applies to passive income from assets owned by non-US persons. UST and plain vanilla corporate bond coupons are examples of sources of income that are excluded, while coupons on preferred shares are an example of passive income that is not subject to this exclusion; it is no surprise that foreign investors tend to be happy holders of USTs and plain vanilla corporate bonds, while there are very few that would own preferred shares.

There is a footnote (no. 1533) in the OBBBA that seems to indicate the new taxes would not apply to sources of income that are already exempted from paying a given tax, which would be the case with USTs and corporate bonds. While it is far from anyone’s base case that the US government would impose taxes on foreigners holding USTs, the list of things that were not anyone’s base case that have become the base case in 2025 is quite a long one. For now, there is some nervousness which is unlikely to go away until the OBBBA is signed into law, though the expectation is that in practice Section 899 would only impact corporations rather than UST holders.

The consequences of the OBBBA will continue to create headlines at least until it gets approved in the Senate, with or without changes. The risk is that the lack of clarity further undermines confidence in the predictability of US policymaking and deters foreign investment. Beyond the direct consequences, which will only be known once the bill is finalised, the indirect consequence is more uncertainty for businesses and investors. This will continue to drive both an economic slowdown in the US that will be more protracted than previously expected, and an erosion of the US exceptionalism that markets have been used to for several years.