The One Big Beautiful Bill Act, passed by the House and now making its way through the Senate, includes proposed Section 899, intended to counteract foreign tax regimes discriminatory toward U.S. interests. The newly proposed rules would impact foreign persons and U.S. companies with foreign owners who are residents of jurisdictions and have “unfair foreign taxes.”
The proposed Section 899 rules would impose retaliatory tax measures on individuals, foreign governmental entities and foreign entities resident in countries deemed to have “unfair foreign taxes” (e.g., Digital Service Taxes and other extraterritorial or discriminatory taxes such as the OECD’s Pillar Two Under-Taxed Profits Rule). Under the proposed code section, the U.S. Treasury would issue guidance to identify the countries with unfair foreign taxes. The proposed rules would generally impose higher withholding rates, increased tax rates on effectively connected income, increased branch profits tax rate and modifications to the Base Erosion Anti-Abuse Tax (“BEAT”).
Section 899 would impose increased tax rates on applicable foreign companies through a 5% annual increase, up to 20%. For example, the general withholding rate on dividends (and other FDAP income) is 30%; over time, as the 5% annual increases come into effect, the maximum general withholding rate would be 50%. The Joint Committee on Taxation report (JCX-21-25) also stated that the increased rates will override any reduced rate provided in a U.S. tax treaty and be added to the reduced rate provided under a treaty.
The U.S. Federal income tax rate on applicable corporate taxpayers would also increase by 5% each year from 21% to 41%.
An exemption from the application of Section 899 is provided for U.S.-owned foreign companies, where U.S. owners hold more than 50% of the combined voting power or value of the stock of a foreign company.
Section 899 would also modify the BEAT rules for non-publicly held U.S. corporations that are more than 50% owned by applicable foreign persons with a U.S. trade or business. It would remove the gross receipts and base erosion percentage thresholds that generally need to be met for taxpayers to be subject to the BEAT. Currently, the BEAT is a corporate minimum tax designed to prevent large multinational corporations from reducing their U.S. tax liability through deductible payments with related parties (such as interest, royalties and service fees). It applies to corporations with average annual gross receipts of at least $500 million and a base erosion percentage of 3% or more, ensuring they pay a minimum level of tax on modified taxable income that includes these base erosion payments. The proposed modification would remove the threshold tests and make the BEAT applicable to all foreign corporations with a U.S. trade or business resident in countries with “unfair foreign taxes” or U.S. corporations owned by shareholders who are residents in those countries with “unfair foreign taxes.” The BEAT rate for applicable persons would also increase from 10% to 12.5%.
We will continue to monitor the status of these rules as the bill moves through Congress.
Author: Calvin Yung |[email protected]
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