Gregory T Bryant, CPA and Attorney at Law
Caroline White, JD
Introduction
On May 22, 2025, the House of Representatives passed the “One Big Beautiful Bill Act,” (“OBBBA”) which will now be considered by the U.S. Senate. Section 112028 of this Act proposes an addition to the Internal Revenue Code, Section 899, entitled “Enforcement of Remedies against Unfair Foreign Taxes.” The House’s approval has prompted widespread discussion and slight panic about Section 899’s potential implications as a retaliatory measure.
Summary
As of the date of this article, June 13, 2025, we recommend a wait-and-see approach to this legislation at this time because it may be significantly modified in the Senate and Joint Committee after that. As more attention focuses on Section 899 and its far-reaching impacts, more people are expressing concern. We expect Section 899 to be significantly narrowed, and more restrained through the process.
What is Section 899?
Generally, Section 899 is a straight up attack on the Organization for Economic Cooperation and Development (“OECD”) and the European Union (“EU”). The new law would increase the U.S. tax burden on certain foreign persons and entities associated with foreign countries that disproportionately target U.S. persons or businesses. 899 is referred to as “retaliatory” because it only applies to a country after that country has first imposed a “discriminatory” tax on the U.S.
Specifically, 899 aims to combat these “unfair foreign taxes” by automatically increasing U.S. tax rates on certain foreign individuals, called “applicable persons.” Currently, there are three enumerated “unfair foreign taxes” that will trigger the tax increases under Section 899. “Unfair foreign taxes” include “undertaxed profits rule” taxes (Pillar 2), digital services taxes, and diverted profits taxes. These are tax regimes that are prevalent in Europe and Australia and Japan. Importantly, Section 899 also provides that the Secretary of the Treasury (the “Secretary”) may, in their discretion, (i) identify any foreign tax as an exception, meaning that it would not be subject to Section 899, and (ii) identify any foreign country as discriminatory. Generally applicable taxes like VAT, sales tax, property taxes, and general income taxes (taxes that fall on consumers) are specifically excluded.
“Applicable persons” include governments (this is new), individual tax residents, and entities in “discriminatory foreign countries,” which is any foreign country imposing unfair foreign taxes. A corporation with greater than 50% of its votes or value owned by applicable persons would also be subject to the withholding tax provisions of 899, regardless of where the corporation is a tax resident, and a corporation with majority U.S. ownership is not subject to 899.
899 would operate in two main ways:
1. Increased U.S. tax rates: For “discriminatory” and “extraterritorial” taxes, 899 increases income and withholding tax rates by a specified number of percentage points, limited to 20% above the statutory rate. The increase begins at 5% and increases by 5% each year the unfair foreign tax remains in effect until the maximum percentage is reached.
2. Base Erosion and Anti-Abuse Tax (BEAT) Modifications: The so-called “Super BEAT”, a form of minimum tax, provisions of 899 would eliminate the gross receipts threshold, remove the 3% threshold base erosion test, increase the BEAT rate to 12.5%, and remove other various exclusions for certain payments. So, any sized corporation with majority ownership by applicable persons would be subject to the enhanced BEAT regime.
Other Considerations
Although Section 899 would modify the application of existing tax treaty benefits, the version passed by the house does not entirely disregard them. Yes, applicable persons would still be subject to the rate increases under 899; however, they are added to the treaty tax rate, not the general statutory rate. The maximum rate increase (i.e., the U.S. statutory rate plus 20%) is still based on the general statutory rate, not the treaty rate.
Although some specifics of 899 would remain to be prescribed by the Treasury, the tax categories deemed to be “unfair foreign taxes” in the text of 899 do give insight into who 899 would be most likely to affect. Untaxed profits rule (UTPR) taxes are one of the main thrusts of OECD’s Pillar 2 global minimum tax, and many member states are set to implement the UTPR provisions in 2025, including the UK, most EU nations, and Australia. Japan is implementing its UTPR provision in 2026. Digital service taxes (DSTs) are broad taxes on gross revenues of tech companies from online sales and e-commerce, data usage, and other digital services and goods, and have already been enacted in the UK, France, Austria, India, Italy, Spain, Turkey, and Canada. Diverted profits taxes (DPTs), which “are designed to address companies shifting profits to low-tax jurisdictions” have been adopted in Australia and the UK.
Potential Implications
Commentators on Section 899 have expressed concern about its “operational impacts” and the uncertainty surrounding forthcoming Treasury regulations—particularly unresolved issues like which residency rules will apply and the additional data that companies will need to collect to determine applicable persons. The Treasury Department’s discretion regarding the designation of discriminatory countries also has sparked concern for companies’ compliance measures, particularly regarding the administrative procedures for publication and updates to the list of designated countries in the Federal Register or other official channels.
The most significant skepticism centers on the risk that the provision could deter foreign investment in the U.S. The Investment Company Institute stated, “Section 899 ‘is currently written in a manner that could limit foreign investment to the US – a key driver of growth in American capital markets that ultimately benefits American families saving for their futures.’” The ICI urged the Senate to make 899 “more targeted…rather than disincentivizing beneficial foreign investment in the U.S.,” and Senator Steve Daines, who sits on the Senate Finance Committee, stated clarification of 899 “may be necessary.”
Conclusion
Section 899 is getting a lot of attention in the press and it is under a lot of scrutiny. As Section 899 advances to the Senate, its broad scope and inherent uncertainties have sparked significant concern among stakeholders. While the provision is designed to counter foreign tax measures that disproportionately impact U.S. interests, many agree that more clarification is needed. While it is prudent to monitor the development of Section 899, it is also important to recognize that its final form and impact remain uncertain. There is still ample time and opportunity for refinement—both in the Senate and, if enacted, through subsequent Treasury regulations.
Sources
https://oecdpillars.com/japan-enacts-law-for-qdmtt-and-utpr-from-april-1-2026/
https://www.pwc.com/us/en/services/tax/library/digital-service-taxes.html