A Deep Dive into the Implications of Proposed Section 899 in the Big Beautiful Bill

The U.S. House of Representatives has recently passed a bill incorporating a significant amendment to the Internal Revenue Code known as Proposed Section 899. This provision, titled ‘Enforcement of Remedies Against Unfair Foreign Taxes’, is aimed at corporations, individuals, and governments of countries that levy discriminatory or extraterritorial taxes on U.S. citizens or corporations. The measure seeks to counter these practices by subjecting the entities involved to heightened U.S. tax rates.

Under Proposed Section 899, the term ‘discriminatory foreign country’ refers to any nation that imposes one or more ‘unfair foreign taxes’. These may include an undertaxed profits rule (UTPR), digital services tax, or a diverted profits tax. The legislation also empowers the U.S. Secretary of the Treasury to classify any extraterritorial or discriminatory tax as an ‘unfair foreign tax’, provided it disproportionately impacts U.S. persons.

‘Applicable persons’, or those who could be affected by the proposed legislation, are defined as individuals or entities that are tax residents in, or are controlled by a tax resident in, a discriminatory foreign country. The provision outlines several categories of applicable persons, including foreign governments, individuals who are tax residents in a discriminatory foreign country, and foreign corporations with a tax residency in such a country. 

The crux of Proposed Section 899 lies in its mechanism to increase tax rates for these ‘applicable persons’. For each tax rate increase, the starting point is the statutory rate or the reduced rate available under an applicable treaty whichever is lower. The rate increase is 5% per year a foreign country is considered a discriminatory foreign country with a maximum rate increase of 20% above the statutory rate.  For example if the a treaty withholding rate is 5%, then the rate would increase 5% per year and would increase 5% per year, not to exceed 50% (20% above the statutory 30% rate for withholding).

It is noteworthy that Proposed Section 899 may significantly impact domestic exemptions and treaty benefits. For example, while certain exemptions, such as the portfolio interest exemption under Sections 871(h) and 881(c), may still be applicable, the legislation provides that it would override existing tax treaties.

The enactment of Proposed Section 899 could lead to an automatic sanctions regime embedded directly into U.S. tax law, primarily aimed at discouraging and eliminating extraterritorial and discriminatory foreign taxes imposed by other countries. Given the potential implications, investors and companies are advised to closely monitor legislative developments in the U.S., as well as in countries that may enact a deemed discriminatory tax. 

The increased rates apply to income tax on effectively connected income, withholding taxes on passive income, FIRPTA withholding on US real property dispositions, branch profits tax, the base erosion and anti-abuse tax and to some other less common taxes applicable to governments and not for profits.  The increased rates apply at the later of 90 days after the bill is effective, 180 days after enactment of the “unfair foreign tax” or the date the “unfair foreign tax” becomes effective.  The bill provides a safe harbor for withholding taxes. This means that the increase in withholding taxes would not apply to an applicable person unless their country of residence is listed by the Secretary as a discriminatory foreign country. 

The Proposed Section 899 amendment is still subject to approval by the U.S. Senate and the President. As of June 16, 2025, the Senate has released its version of tbe bill incorporating Section 899, which includes some significant changes.  If the Senate passes its version, then the House will need to approve the Senate changes before it goes to the President. Given the potential impact on foreign investors and governments, careful monitoring of the bill’s progress and strategic planning upon passage are necessary to navigate the potential tax implications effectively.  If you may be affected by this proposed bill, please reach out to your contact at GreerWalker so we can help you interpret the impact to you or your company.