Jun 1, 2025
Framework and Highlights of the House version
The House version of the One Big Beautiful Bill Act introduces Section 899, a tax provision designed to enforce remedies against “unfair foreign taxes.”
It is important to note that the One Big Beautiful Bill Act is not yet final. It is subject to Senate modifications and final Congressional approval before it can be enacted.
This article outlines key aspects of proposed Section 899, as currently drafted, and explores its potential implications.
Framework and Highlights
Proposed Section 899 provides a mechanism to increase certain U.S. tax rates on applicable persons from discriminatory countries. This increase is capped to prevent it from exceeding the statutory rate by more than 20 percentage points.
Definition of Unfair Foreign Taxes
A "discriminatory foreign country" is defined as any foreign country that imposes one or more "unfair foreign taxes" which include:
Undertaxed Profits Rule (UTPR): A tax targeting profits perceived to be undertaxed under Pillar Two.
Digital Services Tax: Levies on digital services that may disproportionately impact foreign companies.
Diverted Profits Tax: Designed to tax profits perceived as diverted from the taxing jurisdiction.
Extraterritorial Tax: A tax imposed on a corporation based on income or profits received by a person connected to the corporation through ownership, without regard to the ownership interests of any individual.
Discriminatory Tax: A tax imposed predominantly on nonresidents or foreign corporations and levied on a base other than net income.
These taxes would be considered unfair if enacted with the intent to be disproportionately borne—directly or indirectly—by U.S. persons.
However, the legislation clarifies that certain generally applicable taxes—such as income taxes on residents, withholding taxes, consumption taxes (e.g., VAT, GST), transaction-based taxes, property and estate taxes, or taxes affected by consolidation or loss-sharing rules—are not considered unfair foreign taxes.
Definition of Applicable Persons
Applicable persons for this purpose are defined as:
Any government of a discriminatory foreign country.
Any individual who is a tax resident of a discriminatory foreign country, excluding U.S. citizens or residents.
Any foreign corporation that is a tax resident of a discriminatory foreign country, excluding more than 50% U.S.-owned foreign corporations (directly or indirectly, by vote or value).
Any private foundation created or organized in a discriminatory foreign country.
Any foreign corporation, other than a publicly held corporation, if more than 50% of the voting power or stock value is owned directly or indirectly by applicable persons.
Any trust where the majority of beneficial interests are held (directly or indirectly) by applicable persons.
Foreign partnerships, branches, and any other entity identified by the Secretary with respect to a discriminatory foreign country.
U.S. tax rates subject to the increase
As currently drafted, Proposed Section 899 applies to specific U.S. income tax rates, which suggests that not all U.S. income tax rates are subject to the increase. The specified statutory tax rates subject to the increase are:
Individual income taxes
The tax rate on U.S. sourced income that is not effectively connected with a U.S. trade or business, such as certain interest, dividends, rents, royalties, and other types of payments (e.g., FDAP income) and certain capital gains.
The graduated income tax rates for individuals with U.S. effectively connected income, but only to the extent imposed on gains from the disposition of a U.S. real property interest (USRPI).
Corporate income taxes
The tax rate on U.S. sourced income that is not effectively connected with a U.S. trade or business, such as certain interest, dividends, rents, royalties, and other types of payments (e.g., FDAP income) and certain capital gains.
The corporate income tax rate (currently set at 21%) for foreign corporations with U.S. effectively connected income.
The U.S. branch profits tax rate.
Withholding Taxes
For specified taxes that are generally collected via the withholding tax mechanism, the withholding tax rates corresponding to the aforementioned specified tax would equally increase. That is:
The 30% withholding tax rate that is specified in Sections 1441(a) or 1442(a) and applicable to payments of FDAP income, certain capital gains, and certain other types of US-source income.
The withholding taxes involving transactions subject to FIRPTA:
The 15% withholding tax rate that is specified in Section 1445(a) and applicable to dispositions of USRPI.
The withholding tax rate under Section 1445(e) and applicable to certain dispositions, distributions, or other USRPI transactions.
The withholding tax rate under Section 1446(a) on effectively connected taxable income allocable by a partnership to foreign partners.
Proposed Section 899 does not explicitly address its interaction with double tax treaties; however, the Joint Committee Report explained that if another rate of tax applies in lieu of the statutory rate “such as pursuant to a treaty obligation of the United States”, then that rate of tax would be subject to the increase.
Other tax implications
Excise tax - The excise tax rate on the gross investment income of foreign private foundations from U.S. sources would be subject to the increase.
Section 892 - Foreign governments or international organizations which are applicable persons would lose the Section 892 exemption.
Base Erosion Anti-Abuse Tax (“BEAT”); BEAT is a minimum tax on corporations that make significant deductible payments to related non-US entities. Proposed Section 899 would the expand the scope of BEAT for domestic corporations owned more than 50% by applicable persons, triggering:
Mandatory BEAT application regardless of company size, if the relevant corporation would be subject to BEAT had it met the gross receipts tests and base erosion thresholds.
An Increase in the BEAT tax rate from 10.1% to 12.5% and expanding the taxable base due to the none-capitalization treatment for certain related party payments and the elimination of the service cost method (SCM) exemption.
A reduction to the regular U.S. tax liability by all income tax credits (including the research credit under IRC Section 41(a).
Elimination of certain exceptions to base erosion payments subject to U.S. tax (i.e., ECI taxation or via FDAP withholding).
How are the increases computed?
The increase starts at 5 percentage points in the first year following the applicable date, then increases by 5 percentage points annually—capped at 20 percentage points above the statutory rate.
Key considerations:
The increase is incremental and does not override treaty rates entirely. For example, if a treaty rate is zero, the initial increase would still be 5% in the first year.
The 20% cap applies to the statutory rate, not the treaty rate—potentially resulting in a higher overall rate.
If a taxpayer is an applicable person in multiple discriminatory foreign countries, the highest applicable rate applies.
Applicable taxable periods
Proposed Section 899 takes effect on the first day of the calendar year following the later of:
90 days after enactment.
180 days after a country’s unfair foreign tax is enacted.
The first day the unfair foreign tax applies.
However, under the Country List Safe Harbor (see below), the increased rate does not apply if the discriminatory foreign country is not listed by the Secretary or has been listed for less than 90 days.
The increased tax rates cease to apply once the discriminatory foreign country eliminates its unfair foreign tax.
The Secretary would have the authority to introduce anti-avoidance rules.
Safe Harbor Provisions
There are two safe harbor provisions:
Temporary Safe Harbor: No penalties or interest would be imposed for failures to deduct or withhold any amounts before January 1, 2027, if withholding agents demonstrate best efforts to comply in a timely manner.
Country List Safe Harbor: Increased rates do not apply if the discriminatory foreign country is not listed by the Secretary or has been listed for less than 90 days.
Observations
Interaction with Treaties
Proposed Section 899, as currently drafted, does not explicitly address its interaction with tax treaties, aside from referencing the starting base for calculating tax rate increases.
Since treaties are designed to prevent double taxation, additional guidance would be necessary to clarify whether treaty provisions could limit or override the increased tax rates, as well as the broader extent of their applicability.
Notably, this mirrors the U.S. position that certain discriminatory taxes imposed by foreign countries may fall outside the scope of existing treaties, reinforcing a broader debate on the limitations of treaty coverage.
Legislative Process
Proposed Section 899 is likely to put pressure on discriminatory foreign countries to either adjust their tax policies or negotiate a resolution.
The provision is expected to receive greater scrutiny during Senate review and modifications, particularly regarding its legislative framework, specific guardrails, and the extent of Congressional oversight.
Increased U.S. Tax Compliance and Reporting Obligations
Proposed Section 899 would impose heightened U.S. tax compliance and reporting burdens, increasing the risk of liability and penalties for noncompliance, especially for:
Asset management funds
Financial institutions
U.S. entities or branches of foreign corporations
While safe harbor provisions may provide initial relief—allowing time to develop new processes and systems for tracking relevant information—U.S. withholding agents would still bear significant responsibility in ensuring their systems effectively obtain and monitor necessary data to maintain compliance. Given the complexities involved, challenges are likely to arise along the way.
For more information, contact us.
Previous relevant articles on tax policy:
Global Trade – US Tariffs – Ruling by U.S. Court of International Trade
One Big Beautiful Bill Act – The House version of the bill – What’s Next?
Disclaimer
The contents of this insight are intended for general information only. illumina CPA Group, Inc. is not, by means of this communication, rendering professional advice or services. Before making any decisions or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
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