One of the most impactful taxation measures in the One Big Beautiful Bill (OBBB) is Section 899, commonly referred to as the “Revenge Tax.” Section 899 proposes an increase in tax on U.S.-source income for foreign entities in countries that impose “unfair” taxes on the U.S. This measure would impact key economic partners, such as the UK, the EU, Canada, and Australia, which collectively account for the majority of foreign investment in the U.S. The proposed tax increase could reduce demand for U.S. assets and negatively affect international multinational companies. However, this may present an opportunity for companies that generate their revenue domestically to outperform.
Many foreign multinational companies will encounter increased minimum taxes on their U.S. operations, with rates rising from 10% to 12.5%. Additionally, corporations that transfer income from their U.S. subsidiaries to foreign entities or shareholders may face tax rates ranging from 5% to 15%, according to the latest Senate bill. There will also be fewer deductibles available for foreign companies, increasing the amount of income that is taxable. These new tax measures will present a significant challenge for some of Europe’s largest corporations, directly impacting the profits they derive from U.S. operations.
Section 899 will likely decrease the demand for U.S. assets as corporations reduce their exposure, and other countries may implement similar taxes in response. Foreign ownership of U.S. equities is currently near all-time highs, with foreign entities holding approximately 20%. Investors are already concerned about the high concentration of U.S. stocks, which constitute more than 65% of the MSCI ACWI. If foreign capital becomes subject to higher taxes and perceives itself as being unfairly treated, it will likely diversify away from U.S. assets at an accelerated pace. Furthermore, other countries might react to section 899 by imposing stricter taxation on U.S. companies, thereby jeopardizing the profits of U.S. multinational corporations.
With the sustained uncertainty in U.S. markets arising from increased taxation on foreign multinational companies and higher global tariff rates, businesses with significant international economic involvement are likely to face challenges. Companies, whether based within or outside of the United States, that generate their revenue domestically will likely outperform. These companies, focused on domestic markets, have the advantage of avoiding the challenges associated with the volatile global policy landscape, which may enable them to outperform their internationally oriented peers.
Foreign Ownership of U.S. Equities
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