Unpacking Section 899’s proposed ‘unfair foreign tax’ provision

Proposed as part of the One Big Beautiful Bill Act, Section 899 would take aim at “unfair foreign taxes,” specifically targeting the undertaxed profits rule (UTPR) from the OECD’s Pillar 2 framework, digital services taxes (DSTs), and diverted profits taxes (DPTs). The provision is designed to increase the U.S. tax burden for investors tied to countries deemed to be engaging in unfair foreign taxation. This represents a significant U.S. shift in international tax policy, designed to protect American economic interests but with potentially far-reaching knock-on effects.

The proposed Section 899 introduces a two-pronged regime: one component imposes additional income tax and withholding charges on payments made to persons tied to jurisdictions imposing unfair foreign taxes; the second expands the application of the Base Erosion and Anti-Abuse Tax (BEAT).

Specifically, the proposed Section 899 targets:

• UTPRs, DSTs, and DPTs explicitly as unfair foreign taxes
• Other extraterritorial or discriminatory taxes disproportionately affecting U.S. companies as identified by the Treasury Department
• The potential for expansion through periodic Treasury reports identifying additional jurisdictions implementing discriminatory taxes

The original version of the proposed Section 899 was introduced by Rep. Jason Smith, R.-Mo., as part of the Defending American Jobs and Investment Act (H.R. 591). Elements of that proposal were later combined with provisions from Rep. Ron Estes, R-Kan., included in the Unfair Tax Prevention Act (H.R. 2423) and, with modifications, were included in the One Big Beautiful Bill Act. This bill narrowly passed the House on May 22, 2025, and is currently under consideration in the Senate and could see further amendments.

More coverage of the overall legislative process can be found in these stories: “House OKs TCJA expansion bill, now heads to Senate” and “Republicans take major step forward on taxes.”   

While the proposed Section 899 introduces a new retaliatory mechanism, it is worth noting that Section 891, already in law, has previously been available as a response to extraterritorial and discriminatory taxation. This provision, which would allow the U.S. to double the tax rate on citizens and corporations from countries imposing extraterritorial and discriminatory taxes, has never been invoked in practice and is viewed as something of a “nuclear option,” so in comparison, the proposed Section 899 is a more measured — and more likely to be invoked — approach.

How would Section 899 operate in practice?

The proposed Section 899 establishes two distinct enforcement mechanisms aimed at countering foreign tax measures deemed unfair to U.S. interests. The first introduces an increased tax rate for a range of U.S. tax liabilities; the second makes targeted amendments to the BEAT regime, significantly expanding its scope in certain inbound structures. These two regimes are complementary but operationally separate, each with its own applicability rules, effective dates, and compliance considerations.

Tax rate increases

The increases to specified rates of tax target payments to, and business activity involving, A discriminatory foreign country is one that imposes unfair foreign taxes, as described in Section 899. Notably, for the withholding tax component of the bill, any foreign corporation which is majority-owned by vote or value by such persons also falls within scope, even if such foreign corporation is not directly resident in the offending jurisdiction.

Foreign corporations may be excluded from the scope of Section 899 if they are considered “United States-owned” (as described in 904(h)(6)), meaning more than 50% of the entity’s vote or value is held directly or indirectly by U.S. persons. This carve-out could insulate widely held multinationals with significant U.S. shareholder bases, even where those U.S. investors do not control the business or own significant interests in such businesses. The exclusion is particularly relevant in both public company and private equity contexts and may require careful consideration when assessing scope and potential exposure.

Understanding the scope of applicable persons is central to understanding and applying proposed Section 899.

A discriminatory foreign country is one that imposes an unfair foreign tax, which specifically includes UTPRs, DSTs, and DPTs. Treasury also has authority to identify additional jurisdictions through quarterly reports where foreign tax measures are extraterritorial or may disproportionately impact U.S. taxpayers. The rules provide a defined starting point, with built-in flexibility to adjust as new regimes emerge ꟷ or to unwind the provisions for specific jurisdictions should they repeal or redesign the measures that originally brought them within scope.

The bill provides definitions of “extraterritorial” and “discriminatory” taxes and also outlines exclusions, such as general income taxes or value added-type taxes. These exclusions include (but are not limited to) taxes imposed on citizens or residents of a foreign country that is calculated by reference to the income of a corporate subsidiary (which appears to carve out Pillar 2’s primary taxing mechanism, the Income Inclusion Rule). 

The rules impose an escalating tax charge on certain U.S.-source payments made to non-U.S. residents linked to jurisdictions that maintain unfair foreign taxes. This applies across three principal categories:

• Withholding taxes (e.g., on FDAP income such as dividends, interest, and royalties)
• Income taxes on effectively connected income of non-U.S. persons
• Tax on dispositions and distributions involving U.S. real property interests (as governed by FIRPTA)

For each category, the “specified rate of tax” (i.e., the of tax or any tax in lieu of the statutory rate) would be increased by the “applicable number of percentage points.”

This increase begins at five percentage points, increasing by an additional five percentage points on each annual anniversary of the date the relevant unfair foreign tax first takes effect (and remains in effect), up to a maximum of 20 percentage points above the statutory rate.

Unlike prior versions, the current bill does not include language that explicitly overrides existing income tax treaties. In prior drafts, treaty benefits were disregarded for the purposes of applying the increased rate. In the final House version, these references were removed to impose the additional tax on the prescribed rate included in the treaty.   

Examples:

• Where a double tax treaty reduces the U.S. withholding rate on interest to 0%, the proposed Section 899 would impose an additional five-percentage-point charge in the first tax year following the applicable date, increasing five percentage points in each subsequent year while the provision remains applicable ꟷ resulting in a 10% rate in Year 2, 15% in Year 3, and up to 50% for subsequent years (20 percentage points above the U.S. statutory rate).
• Where no treaty applies and the statutory rate is 30%, the total rate would rise to 35% in the first tax year following the applicable date and could reach 50% after four anniversaries.
• A statutory cap ensures the total rate does not exceed the statutory rate (e.g., 21% for effectively connected income) plus 20 percentage points. For example, where a non-U.S. resident derives effectively connected income taxed at 21%, the proposed Section 899 surcharge would be capped at a combined rate of 41%.
• These increased rates apply only while a jurisdiction is considered discriminatory or extraterritorial, and only to persons classified as applicable persons. Once the relevant tax is repealed, the surcharge ceases to apply on a prospective basis. For example, if a foreign jurisdiction withdraws its UTPR as of Dec. 31, 2025, and has no other unfair foreign taxes in force, the surcharge would no longer apply to payments made on or after Jan. 1. 2026. The applicable surcharge would drop to zero from that date forward.

The operational reach is therefore broad, but targeted, and applies only where there is a substantive connection to a foreign regime perceived to discriminate against U.S. taxpayers.

This mechanism is intentionally retaliatory in design. By increasing the U.S. tax burden on inbound payments from jurisdictions with discriminatory regimes and on the U.S. activity of foreign persons, the proposed Section 899 seeks to create a clear economic incentive for those jurisdictions to repeal the offending taxes.

Enhanced Base Erosion Anti-Abuse Tax (Super BEAT) provisions

The proposed Section 899 also incorporates an enhanced version of the BEAT, aimed specifically at corporations that are majority-owned (directly or indirectly) by persons residing in jurisdictions imposing unfair foreign taxes. This modified regime, referred to as the “Super BEAT,” represents a significant escalation in the application of the existing BEAT framework.

The definition of an applicable person under the Super BEAT rules generally mirrors that used for the tax rate increases but is expanded to include U.S. corporations that are owned, directly or indirectly, by entities organized or resident in a discriminatory foreign country. However, foreign corporations that are more than 50% owned by U.S. persons are excluded from scope, as described above.

Super BEAT provisions:

• The gross receipts threshold is eliminated. The standard $500 million revenue threshold, which typically limits BEAT applicability to large corporations, is removed entirely.
• The 3% base erosion percentage test is also removed. BEAT will apply regardless of how significant a corporation’s base erosion payments are in proportion to its overall deductions.
• The BEAT rate is increased to 12.5%.
• Other available exclusions that are often favorable to taxpayers are removed for purposes of applying the Super BEAT. This includes:
  • Payments that qualify under the services cost method exclusion
  • The exclusion for payments made at cost
  • The exclusion for base erosion payments already subject to U.S. withholding tax
• Certain capitalized expenses would be treated as deductions and bring more payments into the scope of the rules. If a payment would otherwise have been considered a base erosion payment but is instead capitalized, it is still treated as deducted for BEAT purposes.

To fall within scope of this enhanced regime, a corporation must be more than 50% owned (by vote or value) by persons described as applicable persons in a discriminatory foreign country. This includes foreign corporations, trusts, partnerships or other entities with a direct or indirect ownership link to jurisdictions imposing unfair foreign taxes.

The result is a substantially broadened and more aggressive application of BEAT. In practice, the Super BEAT will apply to many inbound groups that are currently outside the existing BEAT regime, and it significantly narrows the planning opportunities that might otherwise reduce exposure. As with the additional withholding and income tax charges, the overarching goal is to penalize and deter inbound structures linked to foreign tax regimes the U.S. views as discriminatory.

Timeline for implementation

The timing rules differ depending on whether the provision relates to the additional withholding tax charge or the income tax and Super BEAT provisions. These timelines are central to determining both when the increased rates begin to apply and how the surcharge increments are calculated over time.

The illustrative timeline outlines the expected effective dates of the proposed Section 899 withholding tax charge and the enhanced income tax and Super BEAT provisions. It is based on a common implementation pattern for the UTPR adopted by many jurisdictions and assumes a calendar year taxpayer. It also presumes that the bill is enacted prior to July 4, 2025, consistent with the timeline set by the Republican administration to advance its broader legislative agenda ahead of the Independence Day recess. Actual applicability may vary depending on the enactment and effective dates of the relevant foreign tax measures in each jurisdiction.

Next steps

The proposed Section 899 represents a significant shift in U.S. international tax policy, specifically targeting foreign investment linked to jurisdictions imposing unfair foreign taxes. The implications for businesses and investors are substantial:

• Reciprocal retaliation risks: The additional taxes imposed by proposed Section 899 could prompt foreign jurisdictions to adopt similar retaliatory measures, escalating international tax disputes. The measures may lead to potential conflicts with existing bilateral tax treaties, raising both diplomatic and legal uncertainties.
• Material tax leakage: In many cases, the proposed Section 899 will create substantial tax leakage for foreign-parented groups operating in the U.S., potentially affecting foreign direct investment and broader economic activity.
• Increased compliance burdens: Companies face significantly greater complexity and higher costs associated with compliance, as navigating the interplay between the proposed Section 899 and existing tax regulations becomes more challenging.