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Rep. Ron Estes, R-Kan., a senior member of the House Ways and Means Committee, has proposed international tax changes (PDF - 133.97KB) that would penalize foreign companies based in jurisdictions levying digital services taxes (DSTs) on U.S. firms.
The bill, which builds on the international tax regime Republicans crafted in 2017 and modified in 2025, also would make a number of changes favorable to U.S.-based multinationals.
Estes’ bill, the U.S. Innovation and Global Competitiveness Act (no bill number as of publication), would create a new exception to the base erosion and anti-abuse tax (BEAT) but disallow the exception for payments to foreign related parties based in jurisdictions with a DST or other “discriminatory tax.”
Under the BEAT, an additional tax is generally imposed when a taxpayer’s applicable percentage of modified taxable income exceeds its regular tax liability, as adjusted for certain credits. The proposal would create a high-tax exception under which certain payments to related foreign parties would not be treated as base-erosion payments if the recipient is subject to an effective foreign tax rate of at least 18.9%, equal to 90% of the U.S. corporate tax rate.
The exception would not be available for payments involving jurisdictions that impose DSTs or other discriminatory taxes on U.S. companies. Accordingly, the proposal would generally preserve existing BEAT exposure for those payments while providing potential relief for qualifying payments involving other jurisdictions.
The proposal also would modify the treatment of U.S. business tax credits under the BEAT. Under the existing minimum-tax framework, a domestic tax credit that reduces regular tax liability may increase the taxpayer’s base erosion minimum tax amount, potentially offsetting the intended benefit of the credit. The bill generally seeks to prevent qualifying domestic credits from increasing BEAT liability and would permit general business credits to offset BEAT more fully. The scope of the relief, including which credits qualify and how the changes would interact with the Section 38 limitations, will depend on the final statutory language.
“This bill keeps our protections against profit shifting in place while making sure U.S. job creators aren't hit with double taxation or penalized for routine business payments that don't erode our tax base,” Estes wrote in a statement introducing the bill. “It also makes clear that digital services taxes or other discriminatory taxes that target American companies are still treated as base eroding.”
Last year, Estes was one of the authors of Section 899 included in the House-passed version of the GOP’s tax package, the One Big Beautiful Bill Act (OBBBA). The provision, often referred to as a “revenge tax,” would have imposed additional income tax and withholding charges on payments made to persons tied to jurisdictions imposing unfair foreign taxes, but the primary target then was Pillar 2’s undertaxed profits rule.
Grant Thornton insight:
Estes has long been vocal on the issue and appears interested in keeping it in the mix of future tax legislative discussions. Both Republicans and Democrats have long decried DSTs, which they say target large U.S. technology companies. The U.S. and several trading partners previously reached arrangements under which certain countries agreed to delay the introduction of new DST-related measures or provide transitional relief while negotiations continued at the OECD. Nevertheless, a number of jurisdictions have continued to maintain and collect DSTs.
In addition to corporate tax retaliation, President Donald Trump has repeatedly threatened tariffs on countries that implement DSTs, dating back to 2019, most recently threatening 100% tariffs on imports from countries that collect digital taxes.
As part of ongoing trade talks with the U.S., Canada repealed its short-lived DST this year and is refunding payments. The Trump administration also received tacit commitments in some trade negotiations with countries in Central America and Asia that they would avoid DSTs.
Though Democrats are critical of the administration’s wide use of tariffs, the broad U.S. consensus against foreign DSTs means that could be one of the few areas of cooperation between them and the Trump administration if control of the House of Representatives and/or Senate flips in midterm elections.
Taxpayer-favorable proposals for multinationals
In addition to reducing BEAT exposure for U.S.-based multinationals, Estes’ bill also would reduce several taxes associated with foreign earnings, simplify certain foreign tax credit and Subpart F rules, and encourage companies to keep or bring intellectual property back to the U.S.
The proposal would increase the Section 250 deduction from 33.34% to 40% for foreign-derived deduction-eligible income (FDDEI). It also would remove the remaining net CFC tested income (NCTI) foreign tax credit haircut and allow companies to claim the full amount of certain foreign taxes paid by their foreign subsidiaries. These changes would have the practical effect of imposing less tax on U.S. multinationals’ qualifying foreign income, lowering the effective tax rate on foreign operations, minimizing double taxation and making foreign taxes more fully creditable against U.S. tax.
Grant Thornton insight:
While the provision may benefit a wide range of companies, technology, pharmaceutical, manufacturing, and intellectual-property-intensive companies would likely be among the biggest beneficiaries of these modifications.
The bill would make several additional taxpayer-favorable changes affecting U.S.-based multinational companies. These include proposals to:
- Eliminate the 10% reduction in foreign tax credits (FTCs) associated with NCTI
- Allow NCTI losses to be carried forward for up to five years
- Permit certain NCTI FTCs to be carried forward and carried back
- Reduce the number of FTC categories from four to two
- Remove the taxable-income limitation on the Section 250 deduction
- Add a look-through rule for certain interest payments from foreign subsidiaries
- Provide temporary relief for transfers of intellectual property from foreign subsidiaries to the U.S.
- Modify provisions governing Subpart F income, business-interest deductions and the research credit
In his introductory statement, Estes said he intends the bill to serve as a starting point for the “next round” of international tax changes and a list of options for future tax legislation. He plans to gather additional feedback on the proposals this year and into the new Congress.
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