SECTION 899: THE NUCLEAR TARIFF
Subsection (a) – Increased Rates of Tax on Foreign Persons of Discriminatory Foreign Countries
This section imposes higher tax rates on individuals and entities
from countries that enforce unfair taxes against U.S. persons. The
increased rates apply to various taxes, including those on nonresident
aliens, foreign corporations, and real property gains. The hike starts
at 5 percentage points, rising by 5% annually (capped at 20% above the original rate). Special rules modify the Base Erosion and Anti-Abuse Tax (BEAT), raising its rate from 10.1% to 12.5% and tightening deductions. Withholding taxes on payments to foreign persons are also increased, except for the 14% FIRPTA rate. Temporary safe harbors protect withholding agents from penalties before 2027 if they make good-faith compliance efforts.
Subsection (b) – Definition of “Applicable Person”
An “applicable person” includes foreign governments,
non-U.S. individuals, and corporations tax-resident in discriminatory
countries. It also covers foreign corporations more than 50% owned
by such persons, private foundations, trusts, partnerships, and other
entities benefiting primarily from discriminatory tax regimes. If a
person temporarily stops qualifying as an “applicable person” for less
than a year, they remain subject to the increased taxes during that
period.
Subsection (c) – Definition of “Unfair Foreign Tax”
An “unfair foreign tax” includes digital services
taxes, diverted profits taxes, and extraterritorial taxes that
disproportionately burden U.S. persons. Discriminatory taxes are those
that target nonresidents, apply to income outside the taxing country, or
lack deductions for costs. Exceptions apply to standard income taxes,
VAT, sales taxes, property taxes, and taxes covered by double-taxation
treaties. The Treasury Secretary can identify additional unfair taxes or
grant exceptions.
Subsection (d) – Other Definitions
A “discriminatory foreign country” is any nation enforcing unfair taxes. The term “foreign country” includes political subdivisions and dependent territories (excluding U.S. possessions). The definition of “tax”
encompasses not just rate increases but also base expansions, denial of
deductions, or other adjustments that effectively raise liability.
Subsection (e) – Regulatory Authority
The Treasury Secretary must issue regulations to
enforce these rules, including measures to prevent tax avoidance. The
Secretary can provide exceptions, adjust rules for partnerships and
branches, and ensure the BEAT modifications do not result in double
taxation.
As of end-2024 data, it is estimated foreign investors hold abroad ~14
trillion USD worth of U.S. stocks, ~12 trillion USD of U.S. government
bonds, and ~4 trillion USD of U.S. corporate debt. As of today, there is
virtually zero U.S. withholding tax on gains on this enormous amount of
assets. This was one of the key factors that favored the USD adoption
as a global reserve currency, effectively the only one left today, but
it is also one of the most exploited loopholes in the world to maximize
profits while minimizing taxes due to the U.S., especially by U.S.
domestic corporations. How? Very simple: thanks to sophisticated
transfer pricing mechanisms, most of the profits are held outside of the
U.S., and the cash piled up in favorable taxation countries like
Ireland or Luxembourg is then reinvested into USD-denominated assets
that remain held abroad. This is the reason why you see companies like
Apple or Microsoft issuing onshore debt in the U.S. to pay dividends or
buy back stocks despite the large amount of cash piled in their balance
sheets. This loophole is also used by U.S.-based institutional investors
like hedge funds that set up some of their operations abroad in
jurisdictions like the Cayman Islands.
Section 899 is clearly not only a warning to foreign countries (more on
this soon) but also a warning to corporations that have been exploiting
the U.S. taxation regime greatly for many years, effectively depriving
the country of a large amount of tax revenue that the U.S. is now more
and more in need of. Exploiting this loophole was of great benefit to
U.S. financial markets and those companies with ample access to it, but
it also deprived the real economy of resources and capital investments,
facilitating the accumulation of wealth among those who hold financial
assets (a limited portion of the population). This, combined with QE,
pushed things to an extreme level of wealth inequality everyone today is
familiar with.
The threat to countries here is pretty straightforward, isn’t it? The
U.S. government is laying the ground for labeling a large number of
other countries’ policies as “unfair” and “discriminatory” and targeting
them with a specific tariff that can wreak havoc on their domestic
financial systems as a consequence. For example, what do you expect is
going to happen if the U.S. tomorrow labels Ireland’s tax regime,
notoriously very convenient for many corporations operating in the U.S.,
as unfair and discriminatory? Investors holding a huge amount of USD
assets in those jurisdictions won’t take long to pick up the phone and
call their lawyers and bankers to shift all those assets elsewhere,
delivering a huge blow to Ireland first and to the European Union
afterward because investors will surely assume similar measures will be
extended to the union as a whole in order to close the favorable
loophole exploited from the region for many years. If you think such a
shift of capital from one region to another will be inconsequential, it
is instead the complete opposite. Why do you think the European stock
market, for example, is enjoying such a large amount of demand from
foreign investors, disconnecting valuations from the real economy so
much? The presence of that amount of assets in the region also
translates into the presence of a large amount of collateral that
financial intermediaries can access to fetch liquidity and reinvest it
in Europe.
The more USD debt matures, the higher the amount that is expected to be
reinvested in foreign assets, especially by private investors, and this
will gradually raise yields until these become attractive again for
foreign holders who will now have to pay a tax on gains. Needless to
say, this will significantly increase U.S. government debt costs in the
long term, which will require a bigger amount of money printing to
remain sustainable because I can guarantee you the new inflow of taxes
will not compensate for the loss, as is usually the case. This is why
Section 899 isn’t meant to be a global blanket tax but can be used
effectively to target specific countries, favoring other U.S. allies
that are more open to coming to terms with the U.S. administration on
the commercial trade front and corporates that will be willing to deploy
capital back into the U.S.
By now there should be no more doubt about the “nuclear tariff”
definition I gave to Section 899, a tariff that will be more of a threat
than a real weapon the U.S. is willing to use because in the long term,
it can create a dangerous precedent and push more countries to shift
away from the USD as a reserve currency, effectively creating two
“blocks” in the global economy. On one side, countries that will see
limited to no damage from U.S. decoupling will move further away, while
on the other side, countries that cannot live without U.S. consumer
demand will be forced to bend the knee and become even more dependent on
the U.S. Considering the growing amount of U.S. debt, a decoupling will
surely decrease the long-term demand for U.S. government bonds with
dangerous consequences for the global financial system, but if the U.S.
administration ultimately comes to a point where they think it will be a
risk worth taking because more taxes and re-industrialization of the
U.S. economy will be of greater benefit and help repay the debt in the
long term, then no one should be shocked if at a certain stage this
nuclear tariff will be used in the same way the nuclear bombs were used
on Hiroshima and Nagasaki to send a strong message to the whole world.
"Fire! for God's sake fire!" — and
thousands shared the fate of Davis and Hosmer.There was not one hireling there.I have no
doubt that it was a principle they fought for, as much as our ancestors, and
not to avoid a three-penny tax on their tea; and the results of this battle
will be as important and memorable to those whom it concerns as those of the
battle of Bunker Hill, at least.”
(HDT,
Walden Brute Neighbors)
On May 22, 2025, the House of Representatives passed the One Big Beautiful Bill Act (OBBBA). Tax-related proposals contained in the OBBBA would extend or make permanent select corporate, international and individual tax provisions originally enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) that either have expired or are scheduled to sunset on December 31, 2025.
The OBBBA also contains several other provisions, including:
- Retaliatory measures against foreign countries that have enacted certain “unfair foreign taxes.”
- An increase of the cap on state and local tax (SALT) deductions of individual taxpayers to $40,000 and new restrictions on SALT deductions for certain partnerships.
- Significant modifications to green energy tax credits enacted under the Inflation Reduction Act (IRA).
The Senate is expected to take up the OBBBA in June 2025, with a target date of July 4, 2025, set for the bill’s enactment. Below, we summarize key aspects of the OBBBA and provide our preliminary analysis
