PROPOSED SECTION 899: TAX INCREASES TARGET FOREIGN INVESTORS FROM COUNTRIES WITH "UNFAIR FOREIGN TAXES"
On May 22, 2025, the House passed H.R. 1 (the "House Bill").[1] While the House Bill generally focuses on domestic taxpayers, it includes section 899, "Enforcement Remedies Against Unfair Foreign Taxes," which, if enacted, could dramatically impact the US tax liability of foreign taxpayers, including foreign fund investors, sovereign wealth funds, and foreign pension funds. Specifically, section 899 could substantially increase certain US tax rates applicable to residents of countries that impose “unfair foreign taxes.” Although it is unclear whether section 899 will ultimately be adopted by Congress, its potential broad reach and the shift in US international tax policy warrant a closer examination of its implications as provided in the House Bill.
What Is an "Unfair Foreign Tax"?
Section 899 establishes two categories of unfair foreign taxes, either of which causes a country to be classified as a “discriminatory foreign country” for purposes of applying section 899. The first category are taxes that are automatically deemed unfair (“per se unfair foreign taxes”):
- Digital Service Taxes (“DSTs”): These taxes specifically target digital services and are commonly imposed by countries aiming to tax the revenues of large technology companies derived from consumers within their borders.
- Under Taxed Payment Rule (“UTPR”) Taxes: Part of the OECD's Pillar 2 framework, these taxes are designed to ensure that multinational enterprises pay a minimum level of tax globally.
- Diverted Profits Taxes (“DPTs”): These taxes target multinational companies that divert profits away from countries where the economic activities occur.
The second category are taxes designated by the Secretary of the Treasury pursuant to a grant of authority in section 899 as unfair, specifically, "an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose indicating the tax will be economically borne, directly or indirectly, disproportionately by United States persons."
A&M Insight: As drafted, the automatic application of section 899 to countries that impose per se unfair foreign taxes does not provide an opportunity for suspending the tax during negotiations with a foreign country or other exercise of executive-branch discretion. This is different than section 891, for example, which requires a Presidential proclamation, which could be delayed or rescinded. Consequently, if section 899 is enacted, taxpayers who are residents in countries that impose per se unfair foreign taxes, should anticipate being subject to these rules without any possibility of reprieve or adjustment.
Which Foreign Taxpayers Are Affected?
Section 899 casts a wide net, targeting "applicable persons" of a discriminatory foreign country as well as foreign and domestic corporations that are controlled by residents of such countries. The definition of applicable person includes:
The governments (including government entities) of discriminatory foreign countries, which would lose their limited immunity from U.S. taxation as provide under the Internal Revenue Code.
Individual and corporate tax residents of a discriminatory foreign country (with exceptions for tax residents who are also US citizens or residents and US-controlled foreign corporations).
Third-country corporations that are controlled (measured by either vote or value) by one or more residents of discriminatory foreign countries (or other applicable persons) provided they are not “publicly held.”
Private foundations organized in discriminatory foreign countries.
Trusts for which the majority of beneficial interests are held, directly or indirectly, by applicable persons.
Other business entities that the Secretary of the Treasury may designate in connection with discriminatory foreign countries (e.g., foreign branches and foreign partnerships).
Although domestic corporations are not included in the definition of “applicable corporation,” a domestic corporation that is controlled by a resident of a discriminatory foreign country would be subject to super-charged BEAT provisions (discussed below).
Importantly, the statute provides the Treasury with regulatory authority to exclude persons who would otherwise be classified as an applicable person. This may be an avenue for some administrative relief from section 899.
Which U.S. Taxes Would Increase?
Section 899 increases multiple categories of U.S. taxes imposed on foreign persons. The provision targets U.S. source interest, dividends, rents and royalties (“FDAP” income), income effectively connected with a U.S. trade or business (with the increase for nonresident aliens limited to tax rates on Foreign Investment in Real Property Tax Act (“FIRPTA”) gains), the US branch profits tax, and the section 4948 excise tax on foreign private foundations.
The provision also increases US withholding tax rates on FDAP income and FIRPTA gains. Significantly, section 899 increases both statutory tax rates and treaty-reduced rates, effectively overriding existing income tax treaties without explicitly stating such an override. The House Budget Committee Report[2] confirms that section 899 does not apply to income that is exempt from taxation under the Internal Revenue Code, such as portfolio interest; but, at the same time, it takes the position that section 899 would apply to income that would otherwise qualify for a treaty exemption (as opposed to a reduced tax rate under a treaty).
Enhanced Base Erosion and Anti-Abuse Tax (BEAT) Provisions
Section 899 proposes major changes to the BEAT regime which significantly expands its scope. Any corporation, whether domestic or foreign, that is controlled by applicable persons would be subject to the BEAT regardless of the regular threshold requirements of $500 million in average gross receipts and a 3% base erosion percentage. Additionally, the BEAT tax rate for these corporations would increase from 10% to 12.5%.
The provision would further expand the BEAT's scope by removing the services cost method exception, eliminating the exception for payments subject to U.S. gross basis taxation, treating capitalized payments to foreign related parties as base erosion tax benefits, and eliminating the ability to use business credits to offset the BEAT liability.
Magnitude of Tax Increases
The tax increases under section 899 are substantial and escalating. In general, applicable tax rates increase by 5 percentage points per year, up to a maximum additional 20 percentage points. The incremental increases would create mounting pressure on foreign countries to eliminate their unfair foreign taxes (or their application to U.S. multinationals).
The increased rates are removed once a country eliminates its unfair foreign tax(es), providing a clear incentive for policy changes. Tax rate increases are determined by reference to calendar years, which means taxpayers with non-calendar tax years may face blended tax rates during transition periods.
Effective Dates and Implementation
For countries that currently have unfair foreign taxes in effect, the non-withholding tax rate increases would take effect for calendar years beginning 90 days after enactment. If section 899 is ultimately enacted into law as proposed by the House, it would most likely take effect for non-withholding tax rates beginning in 2026.
The House Budget Committee Report on the House Bill indicates the IRS would issue quarterly guidance providing a list of discriminatory foreign countries and each country's applicable date. Withholding tax rate increases would not begin to apply to any “applicable person” until such time as its discriminatory foreign country is included on that list.
Withholding agents would receive some protection from penalties and interest for failure to properly withhold prior to January 1, 2027, if they can demonstrate to the Treasury “best efforts” to satisfy their withholding obligations in a timely manner.
Countries Affected
Based on commonly understood definitions of the per se unfair foreign taxes, beginning next year numerous countries and their residents would face section 899's consequences. Countries with digital service taxes include Austria, Canada, France, Guinea, Italy, Nepal, Sierra Leone, Spain, Tunisia, Turkey, Uganda, United Kingdom, and Zimbabwe.[3] Countries that have implemented UTPR taxes include Australia, Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lichtenstein, Luxembourg, Macedonia, Netherlands, New Zealand, Poland, Portugal, Romania, Slovenia, South Korea, Spain, Sweden, Thailand, Turkey, and United Kingdom.[4]
Australia[5] and United Kingdom[6] have diverted profits taxes in effect.
A&M Insight
Section 899 represents an unprecedented approach to what amounts to an international turf war over the global tax base using the U.S. tax system as a diplomatic weapon. While the magnitude of the provision’s potential tax increases is difficult to estimate, over a half trillion dollars of FDAP income alone could face tax increases. For example, 2022 statistics released by the IRS[7] show payments of FDAP income of over $130B and $110B to residents of the U.K. and Canada respectively.[8]
It also is difficult to predict section 899’s ultimate impact with any level of certainty. The provision's automatic application to certain taxes, combined with its broad definition of applicable persons, could significantly complicate international relations and discourage foreign investment in the United States. Alternatively, it could have the intended effect of causing other countries to drop the types of taxes that the Congress and the Trump administration consider to be unfair or at least drop those taxes as they would apply to U.S. multinationals.
Section 899 also raises various interpretative issues that may require clarification as the Senate evaluates the House Bill and crafts its own version of the tax legislation this month. Key areas of uncertainty include the interaction of section 899 with existing income tax treaties and with existing statutory tax exemptions, the impact of section 899 on U.S. taxation of the discriminatory foreign countries, the scope of the Treasury's discretionary authority to designate additional unfair foreign taxes, and the mechanics of implementing section 899’s modifications to US withholding taxes.
The provision's escalating tax increases create strong incentives for affected countries to eliminate their unfair foreign taxes, but they also create planning urgency for affected taxpayers. Foreign investors and U.S. funds with foreign investors should monitor developments in the Senate while beginning to assess their exposure under the section 899 as included in the House Bill. They also should consider potential restructuring opportunities to mitigate the impact of section 899.
[1] H.R.1, One Big Beautiful Bill Act.
[3] Bloomberg BNA as of May 20, 2025, available at: Roadmap: OECD Pillar Two GloBE Rules – Status and Effective Dates
[4] Bloomberg BNA as of May 21, 2025, available at: Digital Service Taxes and Other Unilateral Measures Roadmap
[5] Diverted profits tax | Australian Taxation Office
[7] SOI tax stats - Foreign recipients of U.S. income statistics | Internal Revenue Service
