Tax bill contains 'sledgehammer' for Trump to retaliate against foreign digital taxes

"If foreign countries want to come in the United States and tax US businesses, then those foreign-based businesses ought to be taxed as well," said Representative Ron Estes, a Kansas Republican who helped craft the provision.

Some 17 countries in Europe and others around the world impose or have announced such taxes on U.S. tech products like Meta's Instagram. Germany announced on Thursday it was considering a 10% tax on platforms like Google.

The levies have drawn bipartisan ire in Washington. Democrats who oppose much of the tax bill have not spoken out against the retaliatory tax provision, found in Section 899 of the 1,100-page bill.

Trump has been pressing foreign countries to lower barriers to U.S. commerce. Under the bill, Congress would empower his administration to impose tax hikes on foreign residents and companies that do business in the U.S. The U.S. Constitution gives Congress, not the president, the power to decide on taxes and spending.

The provision could raise $116 billion over the next decade, according to the Joint Committee on Taxation. But some experts warned that an unintended consequence of retaliatory taxes could be less foreign investment in the U.S.

"This new Section 899 provision brings a sledgehammer to the idea that the United States will allow itself to be characterized as a tax haven by anyone," said Peter Roskam, former Republican congressman and head of law firm Baker Hostetler's federal policy team.

The House of Representatives narrowly passed the bill on May 22, and it now heads to the Senate. Democrats broadly oppose the Republicans' tax and spending bill, which advances many of Trump's top priorities such as an immigration crackdown, extending Trump's 2017 tax cuts and ending some green energy incentives.

Section 899 would allow the Treasury Department to label the foreign tech taxes "unfair" and place the country in question on a list of "discriminatory foreign countries." Some other foreign taxes also would be subject to scrutiny.

Once on the list, a country's individuals and its companies that operate in the U.S. could face stiffer tax rates that could increase each year, up to 20 percentage points.

Joseph Wang, chief investment officer at Monetary Macro, said Section 899 could help Trump reduce trade imbalances because if foreign investment decreases it could depreciate the U.S. dollar. This in turn could spur exports of U.S. products by making them cheaper overseas.

Portfolio interest would remain exempt from any tax Trump imposes, but some experts cautioned that taxing foreigners could quell foreign investment in the U.S.

"Foreign investors may change their behavior to avoid the taxes in various ways, including potentially by simply investing elsewhere," said Duncan Hardell, an advisor at New York University's Tax Law Center.

PUSH BACK TO GLOBAL MINIMUM TAX

The new approach follows the 15% minimum global corporate tax deal negotiated by the administration of Democratic former President Joe Biden. Republicans, led by Representative Jason Smith of Missouri, chairman of the House tax committee, opposed that approach, arguing it unfairly benefits Chinese companies.

Foreign countries have invoked that global minimum to slap higher taxes on U.S. tech firms, if they concluded that generous U.S. tax credits for research and development pushed their tax burden below that 15% threshold.

Trump in February directed his administration to combat foreign digital taxes, but they were not addressed in the trade deal announced in May between the U.S. and the United Kingdom, which imposes a 2% levy on foreign digital services.

It was unclear if the Treasury Department would actually use the new authority if it becomes law, or if the mere threat of action would convince other countries to change course. The department did not share its intended strategy when asked.