Credit investors threatened with tax hike on US income

The US tax bill, which recently passed the House of Representatives and is now with the Senate, comes in at over 1,000 pages long and contains a section which stands to present challenges for both US and foreign corporations.

Section 899—"Enforcement of Remedies against Unfair Foreign Taxes”—aims to retaliate against countries with taxes including an undertaxed profits rule (UTPR) and digital service taxes (DST). The former aims to ensure that multinational enterprises (MNEs) pay a fair share of tax wherever they operate and generate profits. The latter is imposed on the revenues of search engines, social media platforms and online marketplaces.

In the event that section 899 is triggered, entities from “discriminatory foreign countries” would be hit by a tax increase on US income of 5 percentage points annually, up to a maximum of 20%, for each year the "unfair foreign taxes" are imposed.

The final wording of the bill has not yet been confirmed. Implementation in its current form could present a material headwind to US credit, given that approximately 30% of buyers are from outside the country.

Figures from the Department of the Treasury show foreign holdings of US securities increased by $4 trillion last year to reach $30.9 trillion by June 2024. Foreign holdings of US corporate debt reached $4.2 trillion over the same period and 83% of these holdings are denominated in dollars.

The proposal has the potential to generate further market uncertainty at a time when such sentiment is in no small supply, and result in significant disruptions. This raises the possibility of a slowdown in foreign investment from countries affected by the proposals.