While Trump’s Tariffs Are In Court, A Hidden Tax Rule Could Quietly Disrupt Global Trade

UNITED STATES — While legal battles stall Trump's tariff strategy, a new law could turn the U.S. tax code into his next economic weapon

The proposal exists as a provision within Trump's infamous "One Big Beautiful Bill Act," which made it through the House of Representatives last week. It still needs to gain the Senate's approval.

Section 899 would essentially punish foreign countries that impose taxes the U.S. deems unfair or discriminatory toward American businesses, like digital service taxes or undertaxed profit rules. How? By jacking up the U.S. tax rates on people and entities from those countries doing business in America.

“It’s very bad,” Beat Wittmann, chairman of Switzerland-based Porta Advisors, told CNBC. “This is huge — this is just one piece in the overall plan and it’s completely consistent with what this administration is all about.”

The provision is framed not just as a punitive measure, but as a strategic lever in international tax diplomacy.

"Importantly, the proposal is intended to serve as a diplomatic negotiating tool aimed at persuading foreign governments to withdraw or avoid adopting taxes," wrote Mohsen Ghazi, a partner at McDermott Will & Emery.

As fear swept Wall Street this week, investors and law firms were already warning of the consequences the provision, labeled as Section 899, could have on the market.

The bill could "significantly increase tax rates applicable to certain non-U.S. individuals and business, governmental, and other entities connected to jurisdictions that impose “unfair foreign taxes” on U.S. individuals and business entities in such jurisdiction," said Max Levine, head of U.S. tax at Linklaters, a law firm.

According to CNBC, this could also extend to foreign governments and central banks — major holders of U.S. Treasuries. As of March, France and Germany alone collectively held about $475 billion in U.S. government bonds.

“We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes,” said George Saravelos, global head of FX research at Deutsche Bank, who wrote a memo to clients on Thursday, according to multiple reports.

“Section 899 challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals,” Saravelos wrote in his memo, under a subtitle: “weaponization of US capital markets into law.”

Under the new tax bill, the U.S. would hit investors from foreign countries by increasing taxes on U.S. income by 5 percent each year. That rate could go up to 20 percent.

In turn, just passing legislation like this one could make dollar assets less valuable to foreign investors, Emmanuel Cau, head of European Equity Strategy at Barclays, said in a Friday note to clients, according to CNBC.

“In our view, this is a risk for those companies generating US revenues, and domiciled in countries that have enacted Digital Services Taxes (DST) or are implementing the OECD’s Under Taxed Payment Rule (UTPR),” he wrote.

Cau said companies like Compass Group would be affected. The London company provides catering services in the U.S. and to InterContinental Hotels, which owns 25 luxury hotels across the nation.

“Given US net international investment position is sharply negative, there is indeed scope for capital outflows if indeed S899 passes through the Senate in its current form,” he added, according to CNBC.

The Senate will consider Trump's bill act in June. Republicans hope to get the bill enacted by July 4.