Section 899 (which has cleared the House but is still pending Senate approval) introduces a bold U.S. tax response to foreign levies viewed as disproportionately impacting American businesses. Targeting measures like the OECD’s UTPR, Digital Services Taxes (DSTs), and Diverted Profits Taxes (DPTs), the provision proposes higher U.S. tax rates on certain cross-border payments involving jurisdictions that impose such taxes.

Broader Scope of “Unfair Foreign Taxes”

• Under the proposed Section 899, the U.S. Treasury is empowered to classify foreign taxes as “unfair foreign taxes” if they are deemed extraterritorial, discriminatory, or designed to disproportionately burden U.S. persons. While the revised provision maintains its focus on such problematic tax measures, it formalizes the term “unfair foreign tax” to explicitly include UTPRs, DSTs, and DPTs.
  • Digital Service Taxes (“DSTs”): These taxes specifically target digital services and are commonly imposed by countries aiming to tax the revenues of large technology companies derived from consumers within their borders.
  • Under Taxed Payment Rule (“UTPR”) Taxes: Part of the OECD’s Pillar 2 framework, these taxes are designed to ensure that multinational enterprises pay a minimum level of tax globally.
  • Diverted Profits Taxes (“DPTs”): These taxes target multinational companies that divert profits away from countries where the economic activities occur.
• These taxes are now automatically treated as unfair without the need for a separate Treasury designation, effectively streamlining the application of the rule while expanding its reach to other similar foreign measures in the future.

Scope of Rate Increases

• “One Big Beautiful Bill Act of 2025” introduces a retaliatory tax rate increases for certain payments to residents of jurisdictions that impose “unfair foreign taxes”.
• The provision mandates increased U.S. tax rates with respect to U.S. income taxes, withholding taxes, and taxes on dispositions or distributions involving U.S. real property interests (USRPIs).
• For each of these categories, the U.S. tax rate would be increased by “an applicable number of percentage points.”
  • The increase begins at five percentage points
  • It increases by an additional five percentage points each year after the “applicable date.”
  • This escalation can continue annually until the maximum cap (statutory rate plus 20 percentage points) is reached
  • This cap is calculated without regard to any lower treaty-based rate (i.e., it applies to the base statutory rate, not any reduced rate available under a tax treaty)

The increased rates are removed once a country eliminates its unfair foreign tax(es), providing a clear incentive for policy changes.

• In simple terms, if a foreign country imposes an “unfair tax” that disproportionately targets U.S. companies, and the U.S. government officially designates that country as “discriminatory”, then the U.S. can respond by increasing taxes on U.S.-source income earned by “applicable persons.”

An “applicable person” includes:

• Any government (as defined in IRC Section 892) of a discriminatory foreign country
• Any individual (other than a citizen or resident of the US) who is a tax resident of a discriminatory foreign country
• Any foreign corporation (other than a “US-owned foreign corporation”) that is a tax resident of a discriminatory foreign country
• Any private foundation created or organized in a discriminatory foreign country
• Any non-publicly held foreign corporation where more than 50% of the vote or value is owned directly or indirectly by applicable persons
• Any trust or similar entity whose beneficial interests are majority-held by applicable persons
• Any foreign partnerships, branches, or any other entity identified with respect to a discriminatory foreign country by the Secretary for purposes of Section 899

Inclusion of the “Super BEAT” Provision

• Super BEAT applies to corporations that meet the ownership test, meaning more than 50% owned (voting power or value) by foreign entities from discriminatory foreign countries (those imposing unfair foreign taxes).
• The House bill removes key limitations that previously narrowed BEAT’s applicability:
  • Eliminates the $500 million gross receipts threshold
  • Removes the 3% base erosion percentage test
  • Increases the BEAT rate from 10% to 12.5%
• Any amount (except for depreciable/amortizable property or inventory) that would have been a base erosion payment but for capitalization will be treated as deductible for BEAT purposes.
• The revised BEAT under Section 899 disables several key carve-outs that previously reduced BEAT exposure:
  • Payments subject to withholding taxes will no longer be excluded from base erosion tax benefit calculations
  • Service payments eligible for the services cost method (SCM) will now be included
  • Payments made at cost are no longer excluded

Applicable Date:

• Income Tax & BEAT Increases: Apply for tax years starting after the latest of:
  • 90 days post-enactment of Section 899,
  • 180 days after the enactment of the unfair foreign tax,
  • Date the unfair tax begins to apply.
• Withholding Increases: Apply for calendar years when the payee is an “applicable person” (only after a country is named in IRS quarterly guidance: listing “discriminatory foreign countries” + their applicable dates).

• No penalties/interest before Jan 1, 2027, if withholding agents show “best efforts” to comply.

Insights and Implications

• Section 899 marks a bold step using U.S. tax rules to push back against foreign tax systems seen as unfair.
• But it also brings big risks like damaging international relationships, making the U.S. less attractive for investment, and creating uncertainty for businesses trying to plan ahead.
• For multinational companies, especially U.S. funds with foreign investors or foreign entities earning U.S.-sourced income, several risks arise, including sudden increases in tax rates, potential loss of treaty benefits, and complex withholding obligations (simply based on their country of residence or ownership connections)

Examples

• U.S. Income Taxes: A U.S. business has a permanent establishment in a foreign country that imposes a Digital Services Tax (DST) targeting U.S. companies. If that country is listed as discriminatory, the U.S. may increase its corporate income tax on U.S.-sourced income flowing to residents of that country by five percentage points, compounding each year
• Withholding Taxes: A U.S. company pays royalties to a tech firm in France (assuming France is designated as discriminatory). If the normal treaty rate is 0% or 5%, Section 899 can impose a higher statutory withholding rate, starting at 5% above the base rate and potentially increasing annually (up to an additional 20 percentage points), ignoring treaty reductions.
• Tax on U.S. Real Property Interests (USRPIs): A Canadian REIT (in a listed discriminatory country) sells U.S. real estate. Typically, the FIRPTA tax applies. Under Section 899, the gain may be subject to an elevated U.S. tax rate, even if a treaty might have otherwise reduced it

India’s Evolving Position on Digital Taxation and Global Frameworks

India has abolished the Equalisation Levy effective April 1, 2025, signaling a move away from its earlier digital tax framework. The government is considering a new Digital Services Tax (DST), but no formal proposal has been introduced yet. Additionally, India has remained silent on the implementation of OECD’s Pillar Two global minimum tax rules, which may further contribute to future U.S. scrutiny in cross-border tax matters.

While India is currently not on the U.S. list of countries imposing discriminatory digital taxes, the introduction of a DST could lead to its inclusion. If that happens, Indian companies receiving U.S.-source income may face increased U.S. tax rates.