The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
It’s been another whirlwind week in the news, and I haven’t really been commenting on most of what the Trump administration has been doing because, quite frankly, I can’t keep track of all of it. Even limiting my attention to trade and finance related issues, tariff announcements that seem like a big deal just get walked back a few days later. Even last week’s supposedly bombshell revelation that a federal court ruled all the tariffs illegal, briefly sending stock market future soaring, another court blocked the decision 24 hours later, sending markets crashing back down to earth.
However, there is one piece of news that perked my ears up, and it’s in an obscure section of the Big Beautiful Bill that the government is trying to push through Congress, called Section 899.
The “One Big Beautiful Bill Act,” includes the most sweeping changes to the tax treatment of foreign capital in the U.S. in decades under a provision known as Section 899
U.S. foreign tax bill sends jitters across Wall Street, CNBC.com
What is Section 899?
Section 899 is a new addition to the income tax code that would be created by this bill if it gets passed in its current form, and here’s how it works.
Section 899 was created in reaction to the US administration’s annoyance with countries that implemented a Digital Services Tax, or DST. Normally, digital services like streaming services cross country borders freely, since no physical goods are crossing through customs. DST’s are sales taxes that tack a surcharge to digital services provided from outside the country, and the US has been annoyed by this because it allows foreign governments to tax large US tech companies like Google and Netflix.
The US government considers these taxes discriminatory, and labels any country that implements them as a “discriminatory foreign country,” but the number of countries this would include is quite large. Canada has a DST, and so does the UK, France, Spain, Italy, India, and Turkey. Many countries in the EU are also in the process of implementing a DST as well, so this list is going to get very large, very fast.
To punish these discriminatory countries, Section 899 adds a new withholding tax to any citizens from these countries that invest in US assets. This includes stocks, bonds, ETFs, and real estate.
The tax would be structured as a withholding tax, meaning it gets taken out of any dividends, interest, or rent paid to the foreign investor before they receive their money. The withholding tax would start at 5% in the first year, and then escalate by 5% each year until hitting a maximum of 20%.
How It Would Hurt Foreign Investors
Now, before anyone panics, it’s important to not overreact to this. This is still a draft legislation that’s passed one chamber of congress. It’s still being debated in the Senate, and it may not pass at all, or pass with changes. Two major questions in how this new tax would work remain up in the air.
The first questions is: How does this interact with international tax treaties? Even before this change, the default “statutory” withholding rate for foreign investors was 30%, but international tax treaties reduced this. The Canada-USA tax treaty, for example, set withholding tax rates for dividends and interest to 15%, and eliminated it completely for funds held inside a retirement account. If Section 899 overrides the tax treaty, this would potentially increase the withholding tax rate from 15% to a nosebleed level of 50% (30% statutory + 20% maximum increase).
The second question is: Would this higher tax be eligible to be claimed as a foreign tax credit? In Canada, taxes paid to foreign governments can be deducted against your domestic tax bill, so if you have other income that would be taxed, it’s possible for your total tax bill to be unchanged since you could offset it by paying less in domestic taxes.
Both questions are uncertain right now, and we need to know what the answer to these are before we can start figuring out what portfolio changes may be required.
How It Could Hurt the US
Going after foreign investors might seem like free money to the American government, but you have to remember, foreign investors don’t have to invest in the US. About $1T of the US national debt is owned by the UK and Canada alone, and it makes absolutely no sense for anyone in those countries to own US bonds if 50% of the interest gets taken away at source. And given that the US just lost its last AAA credit rating from Moody’s due to the ballooning national debt, US treasuries are not seen as the rock-solid safe investment they used to be.
Even if the US government is still seen as unlikely to default on their debt, Section 899 effectively confiscates a portion of the interest, which makes owning them not very attractive. And if a large number of investors start selling US treasuries at once, it will cause US bond yields to rise, which will make everything in the US more expensive, from mortgages to credit cards. It will also increase the interest rate that the US government pays, and because the national debt is so high, this becomes a big problem as interest payments take up more and more of the government’s budget.
Conclusion
The investment landscape is constantly shifting this year, with new changes to tariffs or tax rules seemingly coming every few days. It’s enough to make your head spin, and a big challenge is filtering out the signal from the noise.
Section 899 stands out as a very significant change that will fundamentally alter the rules that have been around for decades governing cross-border tax planning. It’s still early days, but if this bill becomes law, we’ll be letting everyone know what changes, if any, we’ll be making to our investments in response right here on this blog, so stay tuned!
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