US exceptionalism without the exceptionalism

What emerging market equities tell us about US policy

Treasury Secretary Scott Bessent announced this week a 'joint understanding' with the G7 to carve out US companies from OECD pillar 2 top-up taxes. Pillar 2 introduces a global minimum 15% corporate tax rate and allows other countries to collect additional levies if companies’ home countries do not. The US Treasury is using the G7 deal as the basis for a request to Congress not to proceed with the section 899 'revenge' tax provisions of the One Big Beautiful Bill (OBBB). Those provisions would allow the US to impose retaliatory levies on foreign capital inflows, potentially including Australia's AUD 1.4 trillion inbound foreign investment position in the US. The G7 deal's fudge is to treat existing US tax arrangements as equivalent for the purposes of OECD pillar 2.

The G7 deal is subject to approval by the OECD sometime next week. Congressional leadership has welcomed the agreement, although it is still open to Congress to pass section 899 of the OBBB anyway. Congress might reasonably conclude that the threatened revenge taxes actually worked in alleviating foreign discrimination against US MNCs in this case, arguing in favour of the creation of the new statutory authorities to address other foreign tax practices. So it is not clear that we are out of the woods when it comes to the US increasing taxes on foreign capital inflows.