Section 899 – Why It’s a Risk to US Asset Markets

Section 899 is a proposed US tax provision designed as a retaliatory tax mechanism against countries that impose what the US considers discriminatory taxes on American firms.

It especially targets digital services taxes (DSTs) and certain global minimum tax regimes.

Section 899 is potentially a big deal and is being studied by institutional investors because it changes tax regimes in a way that breaks from past conventions – i.e., taxes that are stable and treaty-based.

Instead, it makes taxes more strategic, political, and retaliatory.

Naturally, this can change capital flows, create higher risk premiums for international investors in US markets, and hence influence market prices.

Key Takeaways – Section 899

• Section 899 is a retaliatory tax policy made against investors, firms, and any kind of financial activity deemed “discriminatory by the US.
• The instability of US rule-making creates a long-term risk to US asset markets, interest rates, and the dollar.

What Section 899 Does

Section 899 authorizes the US Treasury to impose higher US withholding and income taxes on investors, corporations, and financial flows that are connected to countries deemed to be “uncooperative” or “discriminatory.”

Therefore, in practical terms, it can:

• Increase US withholding taxes on dividends, interest, and royalties paid to investors from said targeted countries
• Override existing tax treaty benefits
• Apply escalating penalties if disputes continue

This is quite a bit different than a broad tax hike. 

It’s targeted and conditional, with the central goal to pressure foreign governments rather than raise revenue.

Why This Is a Big Deal for Investors

Treaty certainty is no longer guaranteed

Historically, investors have relied on tax treaties for predictability.

A tax treaty is essentially a bilateral agreement between two countries that sets rules for two main purposes:

1) avoid double taxation and 

2) reduce or clarify taxes on cross-border income – e.g., dividends, interest, royalties, and business profits. 

Section 899 introduces the risk that treaty rates can be nullified, suspended, or overridden.

In turn, this increases cross-border tax friction.

Cross-border capital becomes more political

Capital flows become much more than just calculations and considerations about risk and return. 

There’s now geopolitical tax risk.

It’s especially a concern for investors allocating between the US and Europe.

This creates what some would consider a “geopolitical risk premia.”

Higher effective tax rates on international income

Dividend and interest income netted from US assets could face sudden withholding increases for foreign investors.

This reduces net returns and alters portfolio math.

Asset allocation distortions

If certain countries face punitive treatment, institutional allocators could take various measures.

The most obvious is reducing exposure to US assets.

This, in turn, effectively demands high returns to compensate. The US could face higher interest rates, and more expensive capital flows, which flow through adversely into economic effects.

It affects capital formation. There’s less investment funding productive activities.

It could also shift more capital to neutral jurisdictions.

A precedent for weaponized tax policy

Section 899 signals a shift toward using tax law as a cudgel, very similar to using sanctions and tariffs.

It makes the US a less certain area for global investors.

It’s also not a matter of a return to normal policymaking.

When Biden went into office in January 2021, based on what was being said during the 2017-18 news cycle, one would have assumed that Trump tariffs would have been rolled back entirely.

But that didn’t happen. Once taxes and tax-like measures start, it’s not easy to simply roll them back. 

This is because they become embedded in negotiating leverage and bargaining frameworks as well as domestic political incentives.*

They become things that are more likely to be adjusted and escalated rather than simply temporary measures of one political regime that are to be reversed once a regime with opposing policies comes into power.

*(This includes things like appearing “tough” on foreign government or multinational corporations, appeasing labor groups concerned about job losses and offshoring, responding to voter resentment toward globalization, aligning with industry policy, aligning with national security priorities, avoiding policy whiplash, targeting measures to concentrate benefits and diffuse costs, avoiding accusations of being weak on trade or national interests.)

Conclusion

Section 899 matters because it changes the rules of engagement for international investing. 

Taxes become dynamic, political, and retaliatory rather than stable and treaty-based. 

Over time, that increases friction, volatility, and required risk premiums in US capital markets.

It’s a longer-term risk to US assets, interest rates, and the US dollar.