Is it "killing a thousand enemies and losing eight hundred of your own"? Trump's 899 clause may cause borrowing costs for Americans to soar!

As a tax measure aimed at punishing foreign investors may ultimately backfire on American companies, Wall Street once again witnesses the "wisdom" of policymakers.

Clause 899 of the Trump tax and spending bill targets countries that implement digital services taxes or other corporate tax rules deemed unfair by the United States. Investors and companies from these countries will face gradually increasing tax rates on income derived from U.S. assets, which analysts refer to as a "retaliatory tax."

However, legal experts point out that Clause 899 will affect loan interest payments in a way that harms American companies. Many loan agreements require borrowers to bear such tax increases implemented after the agreement is signed. These requirements are known as withholding tax gross obligations. Borrowers pay withholding taxes to the U.S. government but must "make up" payments to ensure that lenders still receive the full interest.

For example, a 5% withholding tax would require a borrower owing $1,000 in interest to pay $50 to the U.S. government and then make up the payment so that the lender still receives $1,000. The borrower's combined tax and interest payment is actually about $1,053—because the make-up payment itself is also subject to withholding tax.

The Double-Edged Sword Effect of Retaliatory Taxes

"This is a significant issue," said Matthew Brown, a partner at the A&O Shearman Washington office, noting that the measure could involve foreign banks lending to U.S. borrowers from their U.S. branches. He stated that this situation is very common in syndicated loans.

Additionally, some borrowers may be able to avoid the increased interest costs brought about by the proposed Clause 899 by kicking non-U.S. lenders out of their credit arrangements. Brown said:

“But whether they do this depends on how strong the borrower's position is and their ability to have a wide range of lending options.”

Some lenders may also choose to absorb the tax costs, as those requiring borrowers to make up payments may be shut out of future deals. "Memories are long," said Carolyn Alford, a partner at the New York law firm King & Spalding.

If the measure takes effect, lenders from affected countries—rather than borrowers—will be expected to bear the increased costs of credit transactions signed thereafter. This may make them less willing to lend to U.S. entities.

Michael Mollerus, a partner at New York's Davis Polk & Wardwell, stated that, for example, French or British banks "will have to assess whether they are willing to continue lending if they face the risk of bearing this uncompensated withholding tax."

Political Resistance and Market Panic

The tax bill still faces numerous hurdles, including opposition from several Republican senators due to cuts to Medicaid and the scale of the deficit. The legislation has been criticized by Musk, who called it a "massive, shameless, pork-filled congressional spending bill" and "an abhorrent monstrosity." Nevertheless, the proposal has already caused panic on Wall Street, with analysts concerned that it will drive away foreign investors. According to the existing provisions, the tax rate increase is designed to rise over time—starting at 5 percentage points and increasing by another 5 percentage points each year until it is 20 percentage points higher than the statutory rate.

House Ways and Means Committee Chairman Jason Smith stated last week that he hopes Clause 899 will serve as a deterrent that is "never deployed," while Senate Majority Leader John Thune told reporters that the Senate is reviewing the clause.

Brown stated that he expects the purpose of the clause is to "bring countries to the negotiating table" to discuss their corporate tax rules:

"I do not believe its intent is to drive up borrowing costs in the U.S."

However, as Wall Street has witnessed countless times, there is often a vast ocean of distance between policymakers' "intent" and market reality.

Risk Warning and Disclaimer

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