Investors in nations with tax regimes that the U.S. deems unfair would face higher tax rates on income earned in the U.S. if the tax bill that’s making its way to the Senate becomes law.
A section of the bill, which passed the House of Representatives on May 22, takes aim at countries including Canada, the U.K., France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. It also targets countries using provisions in a multicountry deal for minimum corporate taxes.
The move to target allies with which the US has decades-old tax treaties underscores U.S. President Donald Trump’s willingness to change or break longstanding agreements with other nations.
The so-called Section 899 provision includes “what you could call a ‘revenge tax’ against what the U.S. considers to be unfair taxes that are levied by other countries on U.S. businesses,” said Robert Kepes, partner with tax law firm Morris Kepes Winters LLP in Toronto.
Institutional investors including sovereign wealth funds, pension funds and even government entities would be affected, as well as retail investors and businesses with U.S. assets.
Section 899 would increase the federal income tax rate on passive U.S. income — such as dividends, interest and royalties — earned by people and institutions that are based in the targeted countries. The first increase would be five percentage points, rising by another five points each year to a maximum of 20 points above the statutory rate.
Tax treaties are meant to prevent an entity from being taxed multiple times on the same income. This section of the bill “effectively overrides certain U.S. tax treaty obligations — a significant departure from longstanding treaty commitments,” according to an analysis by attorneys at Greenberg Traurig LLP.
The legislation also overrides special rules for government bodies such as central banks. For example, the Bank of Canada is currently exempt from having taxes withheld by the U.S., “but this suggests that a withholding tax would apply,” Ronald Nobrega, partner with Fasken Martineau DuMoulin LLP, said of the bill.
Tax liability
The bill’s broad nature also suggests withholding taxes may apply to U.S. income earned in tax-sheltered retirement accounts. “There would be an unexpected tax liability for many Canadian investors and Canadian companies,” Nobrega said.
The Securities and Investment Management Association, a Canadian industry group, estimates the U.S. legislation would cost Canadian investors as much as C$81 billion ($59 billion) in additional taxes over seven years.
The bill requires the government to name the countries with an unfair tax regime, Kepes said, giving nations time to try to negotiate their way out of the tax.
Trump has consistently railed against what he views as discriminatory taxes, such as the effort by the Organisation for Economic Co-operation and Development to change tax rules for large digital multinationals and make sure global companies pay a minimum tax on their income everywhere they operate. One of the president’s first executive orders pulled the U.S. out of the OECD work on a global tax.
The Global Business Alliance said in a statement that the U.S. bill “invites a global tax war” and will harm U.S. credibility and undermine investment. Some international companies would face much higher U.S. tax rates and “U.S. workers, not foreign governments, would bear the brunt of the economic fallout,” the group said.
Canada’s economy is highly integrated with the U.S., as the largest buyer of U.S.-made goods and a major exporter to it. In many sectors, Canadian and U.S. companies easily operate on both sides of the border.
But Canada’s government has adopted both a digital services tax and a global minimum tax. The former is a 3% tax on revenue over C$20 million earned in Canada from services that “rely on engagement, data, and content contributions of Canadian users” and applies to major U.S. technology firms including Meta and Alphabet Inc.
European countries, including France, the U.K. and Italy, implemented similar levies during Trump’s first term in the White House as they argued the U.S. was slowing OECD global talks on tax rules for the digital age. Those moves angered U.S. tech firms and Trump, who threatened tariffs. The French government said earlier this year it will not give up on its digital services tax despite the risk of the U.S. retaliation.
Business groups in Canada have criticized the digital services tax for seeming to violate the North American trade pact and inviting retaliatory measures from the U.S. The government of Prime Minister Mark Carney hasn’t indicated whether it will consider scrapping the measure, which was brought in under his predecessor, Justin Trudeau.
“You always pay attention to what other countries are doing, but as you know, every country is sovereign in how they determine what’s in their best interest and their tax policy,” Finance Minister Francois-Philippe Champagne told reporters last week in response to a question about potential U.S. retaliation to Canada’s tax regime.
