The reform holds implications for global investors and multinational businesses

As the U.S. tax reform process continues, the comprehensive tax bill that passed the House of Representatives in May is now under active consideration in the Senate. Earlier this week, the Senate Finance Committee released its own version of the bill to be debated in the Senate. Both bills include significant changes to several international tax provisions and a new retaliatory regime targeting unfair foreign taxes. This update highlights certain of these proposed changes before they have been enacted into law.

Section 899: Retaliatory Measures Against "Unfair Foreign Taxes"

Proposed Section 899 remains a central focus for international investors into the United States. This provision targets countries that have "unfair foreign taxes" (referred to as “Offending Foreign Countries”), which include digital services taxes (DSTs), undertaxed profits rules (UTPR), diverted profits taxes (DPT) and other measures deemed by the U.S. Treasury to disproportionately impact U.S. persons.

Key features of Section 899 include the following:

• The application of increased U.S. tax rates to residents of an Offending Foreign Country. The Senate bill applies increased rates only if a country has "extraterritorial" taxes (such as UTPR and DPT). Treasury is granted authority to identify and designate other discriminatory foreign taxes based on statutory criteria.
• Denial of Section 892 benefits for governments in Offending Foreign Countries and expanded Base Erosion and Anti-Abuse Tax (BEAT) rules for U.S. companies owned by residents of those Countries.
• Under the House bill, Section 899 could apply as early as January 1, 2026, but the Senate bill would delay the effective date to no earlier than tax years beginning on or after 1 year after the bill is enacted into law (which would be expected to be January 1, 2027 for calendar year taxpayers).
• The House bill would phase in increased tax rates by 5% per year, up to a cap of 20% over the statutory rate, while the Senate bill’s rate increase would be capped at 15% above the otherwise applicable rate (including a treaty-reduced or 0% rate). For example, the rate of withholding tax on a dividend subject to a reduced 15% treaty rate could be increased to a maximum of 50% under the House bill, but only to 30% under the Senate bill.
• The Senate bill includes broad language applying the increased rates in cases where a tax is otherwise not imposed by reason of an exemption or exception, or is imposed at a rate of tax equal to zero. In addition, based on Congressional reports, Section 899 is intended to override tax treaties, but it is not clear whether the increased rates would apply to certain provisions that have the effect of an exemption but operate through mechanisms other than simply applying an exemption (e.g., the treatment of qualified foreign pension funds not as foreign persons for purposes of FIRPTA, as opposed to exempting them from FIRPTA directly).
• However, the Senate bill explicitly excludes the portfolio interest exemption (which was also the intent of the House bill) and certain other statutory exemptions from the increased rates.

Other International Provisions of the Bills

In addition to Section 899, the bill includes important changes to other international tax rules:

• Both the House and Senate bills would modify the BEAT, Global Intangible Low-Taxed Income (GILTI) regime and Foreign-Derived Intangible Income (FDII) deduction, but the Senate version reflects more extensive changes, including deeper adjustments to GILTI and FDII deductions, expense allocation rules and a higher BEAT rate.
• The Senate bill would restore the limitation on downward attribution of stock ownership for purposes of determining whether a corporation is a controlled foreign corporation (CFC), a long-awaited “correction” that should ease tax compliance for many multinational groups.

Next Steps

The legislative process remains fluid, with the Senate and House expected to reconcile differences in their respective bills before final enactment. The current target is for the President to sign the final bill by July 4.

We are closely monitoring the process and will provide details on the new rules once they are finalized.