Proposed Section 899 in “One Big Beautiful Bill” if enacted would increase the rate of tax levied against certain foreign corporations, non-resident individuals, foreign private foundations, and foreign governments resident in “discriminatory foreign countries”. The section labels countries as discriminatory if they levy “unfair tax regimes” against U.S. individuals and corporations or foreign corporations in which they own more than 50% of the vote or value. Discriminatory taxes include UTPR, DST, DPT, and other taxes designated by the Secretary of the Treasury, but do not include VAT.
Under the proposal, the U.S. tax rate would increase by 5% for each year that a country keeps its discriminatory taxes in place. The bill caps these rate increases at the statutory rate for the class of income plus 20%. For example, effectively connected income would be capped at 47% and 57% for corporations and individuals respectively. Taxes on payment subject to withholding taxes would be capped at 50%. Even payments subject to a reduced withholding rate under an income tax treaty would be subject to the 5% per year increase.
Under this section, modifications to base erosion and anti-abuse taxes (BEAT) would increase the number of domestic corporation subject to BEAT by eliminating threshold of $500 million and the 3% based erosion percentage test. Thus, resulting in more domestic corporations having to perform BEAT calculations. Further, the bill also expands the definition of base erosion payments by including certain payments subject to withholding and payments that are capitalized to cost of goods sold. Finally, if Section 899 is applicable, the BEAT computation is strengthened in two ways: (1) the BEAT rate applied to modified taxable income is increased from 10% to 12.5% and (2) certain Section 38 credits and R&E credits would not be protected as they are under the current BEAT computation before 2026.
If enacted, the effective date would be the first calendar year after the later of (1) 90 days after the date of enactment, (ii) 180 days after the date of enactment of the unfair foreign tax, or (iii) the first date that the unfair foreign tax applies. As several countries already have unfair foreign taxes in effect, the provisions of proposed Section 899 could be in affect starting January 1, 2026.