What is the ‘revenge tax’ in the US tax bill?

Tucked within the proposed “Big Beautiful Bill”, the more than 1,000-page tax and spending overhaul that United States President Donald Trump wants to see enacted in law, is a provision that is being referred to as a “revenge tax”.

The “Enforcement of Remedies Against Unfair Foreign Taxes” in Section 899 targets countries that the Trump administration believes impose unfair or discriminatory taxes on US companies and individuals, and will allow the US to impose additional taxes on entities from those countries.

The provision calls, for instance, for levies on revenue from digital services, such as data monetisation and online advertising.

The proposal also includes a higher minimum tax on the profits of foreign entities, even if those profits are earned outside US borders. This could impact passive income streams, such as interest and dividends, and may discourage international investors from countries flagged as discriminatory.

The administration’s unpredictable approach to global economic policy has already created uncertainty in international markets. Should this measure be signed into law, it could further erode foreign investor confidence in the US market.

‘This revenge tax move will add to economic uncertainty. It will stop foreign CEOs from investing – the very thing President Trump says he wants. It means more wild economic swings, stock market declines, less stability and a greater chance of recession this year,” Stuart Mackintosh, the executive director of the financial think tank Group of Thirty, told Al Jazeera.

“Every few days, we see a destabilising misuse of US power, more self-inflicted wounds, that look set to drive up prices and slow the economy. America has shredded its political and economic alliances. These revenge taxes underscore that America cannot be trusted.”

Who could be affected

Under the provision, certain foreign governments and international businesses could face an additional 20 percent tax, which would apply to non-US entities earning income from US sources, including interest, dividends and royalties.

Taxes would be hiked gradually at the rate of 5 percent annually.

It would also affect profits earned at US locations, which are transferred to foreign parent companies, as well as income from the sale of US real estate by designated “bad actors”. Trusts, global foundations and partnerships with passive income could also be impacted.

However, exceptions are built into the legislation for foreign pension funds and charitable organisations. The tax would only apply to countries designated as “discriminatory” by the US Treasury Department. Countries not flagged would remain unaffected.

House of Representatives Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, said that while the provision could serve as an effective retaliatory tool, it “will hopefully never take effect”.

According to the nonpartisan Joint Committee on Taxation, the measure could bring in revenue of $116.3bn over the next decade. But it would also lower tax revenue in the long term, by $12.9bn in both 2033 and 2034.

Impacted investment climate

The administration’s shifting trade strategies have already led to legal battles, policy reversals and a climate of unpredictability that has left companies hesitant to make long-term plans.

Companies like toy manufacturer Mattel and automaker Stellantis have suspended financial guidance due to the volatile nature of US tariff policy.

These policies have also contributed to swings in consumer confidence. When Trump announced his series of sweeping tariffs against trade partners on April 2, which he dubbed “Liberation Day”, confidence fell to a 13-year low, only to rebound after the administration paused the tariffs’ implementation.

Analysts warn that provisions like the “revenge tax” could deter foreign investment and strain developing partnerships.

“If you’ve got the headwinds of an extra withholding tax that starts at an extra 5 percent [and] moves up to 20 percent over the subsequent four years, I think [investors would] have second thoughts. In terms of optimising your investment strategy, you’d have a slightly smaller allocation to the US,” Chris Turner, the global head of markets and regional head of research for the United Kingdom and Europe at ING, a financial services company, told Al Jazeera.

There is already evidence that some economies have started diversifying away from the US. Canada, for example, has increased trade with Europe and Asia. Trump’s trade policies have also been cited as a factor in foreign governments divesting from US treasuries, while the European Central Bank continues to promote the euro as a competing global reserve currency.

This measure adds another mechanism to the Trump administration’s broader trade strategy, which has relied heavily on tariffs even as many face legal scrutiny.

Last week, the US Court of International Trade blocked the administration’s blanket global tariffs enacted under the 1977 International Emergency Economic Powers Act. A federal district court temporarily halted the block’s enforcement as legal battles unfold.

Experts believe many of these tariffs may not withstand judicial review.

“There’s no statute that provides the president that authority”, to impose sweeping international tariffs through the International Emergency Economic Powers Act, Greg Shaffer, a law professor at Georgetown University, told Al Jazeera. “And as the court said, if there were such a statute, it would be unconstitutional because the Constitution provides that responsibility to Congress.”

However, the ruling did not address tariffs on aluminium, steel and automobiles, which fall under a different legal basis – the 1962 Trade Expansion Act. Under that statute, Trump recently announced plans to raise those tariffs to 50 percent for most imports.