New Bill Targets 'Discriminatory' Foreign Taxes: Could Trigger Higher U.S. Taxes on Some Foreign Companies and Citizens

The "Defending American Jobs and Investment Act" aims to push back against what it calls unfair taxes imposed by other countries on U.S. businesses and individuals. Basically, if a country is seen as taxing American companies or people unfairly, this bill kicks in with a series of escalating responses.

Tax Retaliation

The core of the bill revolves around identifying and responding to "extraterritorial" and "discriminatory" taxes. An extraterritorial tax, as defined in Section 2, is when a country taxes a corporation based on income received by any person connected to that corporation, even through a long chain of ownership. A discriminatory tax is one that hits income not sourced within that country, isn't based on net income (meaning no deductions for costs), or mainly targets non-residents and foreign entities. Think of it like this: if a country is taxing a U.S. company's profits earned outside that country, or taxing in a way that disproportionately hits U.S. entities, it could get flagged.

Within 90 days of this bill becoming law, and every 180 days after, the Treasury Secretary has to report to Congress (Section 2) listing countries with these kinds of taxes. The report has to detail the tax rates and when they went into effect. The U.S. will then try to talk these countries into repealing those taxes. But if that doesn't work, things escalate.

Escalating Penalties

If a country is on the Treasury's list and doesn't change its tax laws, the bill allows for some pretty strong responses (Section 2). First, income tax and withholding tax rates on citizens and corporations from that country can be jacked up. It starts at a 5% increase in the first year, then goes to 10%, 15%, and finally 20% in subsequent years. Imagine a foreign company operating in the U.S. – their tax bill could suddenly jump significantly. Second, the President gets the power to ban the U.S. government from buying goods or services from anyone in that country. That could be a big deal for foreign companies that rely on government contracts.

Trade and Treaty Implications

The bill also throws a wrench into future trade deals and tax treaties (Section 2). When deciding whether to enter into new agreements, the Treasury, the U.S. Trade Representative, and the Secretary of Commerce are required to consider whether a country has these "discriminatory" or "extraterritorial" taxes. This could make negotiating new deals much harder.

While the bill excludes common taxes like VAT, sales taxes, and property taxes from being considered "discriminatory," the definitions are still broad enough to potentially cause some friction. It's a clear shot across the bow at countries perceived to be unfairly taxing American businesses and individuals, but it also carries the risk of sparking trade disputes and retaliatory measures.