A new ‘Revenge Tax’ bill progressing through the US Senate threatens to upend international tax treaties and could cost foreign investors billions, with Canada alone facing up to C$81 billion in additional taxes over seven years.
At a Glance
- The US bill proposes higher tax rates for investors from countries with tax regimes deemed unfair by American standards
- Canada, UK, France, and Australia are primary targets due to their digital services taxes on tech companies
- Tax increases could reach up to 20 percentage points above statutory rates on US-sourced income
- The legislation may override existing tax treaties and affect retirement accounts
- Critics warn the bill could spark a global tax war and harm US investment credibility
Understanding the ‘Revenge Tax’ Proposal
The proposed US tax legislation contains provisions specifically designed to counter what American lawmakers view as unfair taxation policies implemented by allied nations. The bill would increase federal income tax rates on passive US income for entities from targeted countries, beginning with a five percentage point increase and potentially escalating to 20 percentage points above standard rates. This measure directly challenges established international tax norms and threatens decades of carefully negotiated tax treaties between the United States and its trading partners.
“what you could call a ‘revenge tax’ against what the US considers to be unfair taxes that are levied by other countries on US businesses”, said Robert Kepes.
The legislation requires the US government to identify and list countries implementing tax regimes considered unfair to American interests. This approach does leave room for diplomatic negotiations before penalties are imposed, but the threat of substantial tax increases remains. The bill specifically targets nations that have implemented digital services taxes affecting major US technology companies or have adopted certain international tax provisions viewed as disadvantageous to American businesses.
Impact on International Investors
The consequences for foreign investors could be severe and wide-ranging. The bill would apply to income earned in the US by these investors, potentially imposing withholding taxes on various income streams. Particularly concerning for many individual investors is that the legislation may impose taxes on US income earned in tax-sheltered retirement accounts, which are typically protected under existing treaties. Canadian investors alone could face up to C$81 billion in additional taxes over a seven-year period according to preliminary estimates.
The bill would affect both institutional and retail investors, as well as government entities from targeted countries. Pension funds, sovereign wealth funds, and other large institutional investors that have significant holdings in US assets could face substantial new tax liabilities. The legislation’s broad approach means that virtually all passive income streams from US investments could be affected, including dividends, interest, royalties, and certain capital gains.
International Tensions and Potential Retaliation
The Global Business Alliance has issued warnings that the bill could trigger a global tax war, potentially undermining US credibility in international tax negotiations and harming the investment climate. Several countries targeted by the legislation have already implemented digital services taxes and global minimum tax standards affecting major US tech firms. These measures were largely responses to concerns about tax avoidance by multinational corporations operating in their jurisdictions.
“There would be an unexpected tax liability for many Canadian investors and Canadian companies”, said Ronald Nobrega.
Canadian Finance Minister Francois-Philippe Champagne has emphasized national sovereignty in tax policy decisions, suggesting that Canada is unlikely to back down from its digital services tax despite US pressure. Business groups in Canada have criticized their government’s digital services tax for potentially violating trade agreements and inviting precisely the kind of US retaliation now taking shape. The standoff highlights growing tensions in international tax coordination efforts and raises concerns about cascading retaliatory measures that could disrupt global investment flows.
