US Threatens Foreign Investors with New Tax Proposal
"Financial sector apprehension": Trump legislation sparks concerns on Wall Street
Mark your calendars—a controversial bill is making its way through the US Congress, and it's causing quite the stir. The House of Representatives has already given it a thumbs-up, but it still needs to pass the Senate. The shine on the Land of Opportunity might start to lose its lustre if the bill becomes law, as it includes a special 20% tax on US capital income from foreign investors.
"This is one of the most nerve-wracking ideas to come out of DC this year," says a top-level Wall Street banker to the Financial Times (FT). According to the draft, income such as dividends or licensing fees from foreign investors could be up for grabs. If passed, this tax could put a halt to demand for the dollar or bonds, and experts estimate it could generate $116 billion (around €102 billion) for the treasury over the next decade.
The Trump Tax: A Risk for Foreign Companies
If implemented, this tax would dry up investment in the US for good reasons, the senior executive continued. The high tax rate would make the US less appealing to foreign investors, potentially leading to a decrease in foreign direct investment.
But the foreign investors hailing from certain countries, such as those in the European Union (EU), the UK, India, Brazil, and Australia, have more to worry about. According to the law firm Davis Polk, these countries could be on the receiving end of US financial policy. "The long-term effects on international companies operating in the United States will be quite severe," said Jonathan Samford, president of the "Global Business Alliance," a trade group representing large multinational foreign companies, to the FT.
George Saravelos, head of FX strategy at Deutsche Bank, believes the US government could escalate a trade war into a capital war. Should the new tax be passed, it could backfire and put US bonds under pressure. It seems Morgan Stanley agrees, as the firm stated in a market note that the tax could weaken the dollar, causing foreign investors' appetite for US investments to dwindle.
The looming spectre of economic double taxation
The draft bill makes no exceptions. It won't care if ownership structures are expanded, if capital is routed through intermediaries, or if multinational enterprises seek relief under tax treaties. The US government could potentially engage in economic double taxation, imposing a hardship on multinational entities and increasing their compliance and operational burdens.
If the EU has its say, this won't happen. The EU has expressed strong opposition to the proposed tax, citing concerns about disrupting transatlantic trade relations and undermining global economic cooperation. This opposition could strain US-EU trade relations and lead to a broader trade conflict.
Bonus: A Closer Look
- The proposed tax could significantly deter foreign investment in the US, potentially leading to a loss of revenue for the US government due to decreased foreign direct investment.
- Retaliatory measures by affected countries, like those in the EU, could exacerbate existing trade tensions and disrupt economic relationships.
- The impact on US real estate, venture capital, and private equity markets could be substantial, reducing foreign participation in these sectors and affecting their growth and investment opportunities.
- International companies operating in the US would face increased complexity and operational challenges as they track country designations and apply dynamic withholding rates, potentially resulting in economic double taxation.
"Foreign investors and international companies, notably those from the European Union (EU), the UK, India, Brazil, and Australia, may find US finance and business less attractive due to the proposed 20% tax on US capital income, as it could lead to a decrease in foreign direct investment and complicate their relationships with the US government."
"If enacted, this tax could potentially trigger a capital war, adding pressure to US bonds, weakening the dollar, and straining US-EU trade relations, as the EU has shown strong opposition to the proposed tax and the possibility of engaging in economic double taxation."
