One Big Beautiful Revenge Tax: Hits Foreigners From 'Unfair Tax' Jurisdictions

Forbes

22-05-2025

The U.S. House of Representatives just passed H.R. 1, the 'One Big Beautiful Bill Act' by a narrow margin, with the vote being 215 to 214. Foreign persons (including foreign governments) considering inbound investments should pay close watch as this develops. The OBBBA has many tax provisions, but one (Section 112029 of the OBBBA) would create a powerful new retaliatory tax by adding a new Section 899 to the Internal Revenue Code.
Section 899 as proposed in H.R. 1, titled 'Enforcement of Remedies Against Unfair Foreign Taxes' is aimed at foreign jurisdictions that impose certain discriminatory or extraterritorial taxes on U.S. persons, or certain foreign entities owned by U.S. persons.
In a nutshell, proposed Section 899 would increase the U.S. tax and withholding rates on foreign taxpayers from certain countries that are treated as 'discriminatory foreign countries.' These foreign persons could be subject to significantly higher U.S. tax rates that escalate annually if their country of tax residence or incorporation is treated as a jurisdiction imposing unfair taxes on Americans.
Proposed Section 899 is a response to the proliferation of digital services taxes and similar unilateral tax measures enacted by certain foreign governments. These taxes are perceived by U.S. policymakers as disproportionately targeting U.S. persons, including individuals and multinational enterprises, thereby undermining the competitiveness of American businesses abroad.
Even though the Organisation for Economic Co-operation and Development has been trying to find a solution that addresses profit allocation and global minimum taxation, some countries have moved forward with tax measures, such as DSTs that lack the traditional link or nexus to local profits. According to the official Joint Committee on Taxation staff report dated May 12, 2025, for example, the United Kingdom imposes a two-percent DST on revenue derived from online marketplaces, search engines, and social media platforms which derive value from users in the United Kingdom.
Section 899 seeks to address certain taxes imposed by discriminatory foreign countries, which would include not only DSTs, but undertaxed profits rules, diverted profits taxes and similar extraterritorial or discriminatory taxes that are viewed as violating tax neutrality. The Section would put pressure on foreign governments to repeal such measures by directly hitting the pockets of so-called 'applicable persons' which would include the government itself, its tax residents and entities when any of them invest in America. Applicable persons would not include U.S. citizens or residents, nor U.S.-owned foreign corporations.
The punitive bite of Section 899 would be an escalating increase of U.S. tax rates on foreign persons from any discriminatory foreign country. The initial rate increase would be 5 percentage points, and it would rise each year, up to a maximum of 20 percentage points above the applicable tax rate imposed by the U.S. tax law. Even rates that are reduced by a treaty would not escape the Section 899 tax increase.
This incremental tax would strike diverse income categories, including the U.S. withholding taxes imposed on items of U.S.-source income such as dividends, interest, royalties, and rents; so-called effectively connected income from business activities carried out in America; withholding tax on dispositions of U.S. real property interests; U.S. branch profits taxes; Base Erosion and Anti-Abuse Tax for certain U.S. corporations with foreign ownership.
The Section 899 tax hikes would place a significant economic burden on affected foreign investors and companies operating in America. One must wonder if they will stay, or if those considering a U.S. investment would bother to come in the first place. There is no definitive answer to this critical question as so much depends on various factors. For example, the type of income being earned in America would be an important consideration. Portfolio investors may look elsewhere especially if withholding rates on dividends or interest rise from a treaty-favored rate of 15% to 35% or 45%.
Multinational enterprises with U.S. operations might be inclined to stay put, but they might be less likely to expand. Much will also depend on how aggressively the U.S. enforces the rules if proposed Section 899 is ultimately enacted. Another determinative variable would be how quickly rival countries will seize the opportunity to attract disillusioned investors with favorable tax regimes and strategic incentives.
The OBBBA will now advance to the Senate. As the legislative process continues, whether Section 899 will remain and its final form will depend on ongoing negotiations and potential amendments that take place in the Senate.
There is a clear protectionist message from the proposed Section 899 and the Trump Administration. Retaliation will follow when foreign tax regimes target U.S. enterprises or revenue streams.
What proposed Section 899 tells us is that American businesses overseas will not be undercut while foreign capital in America remains unscathed. Foreign investors to America should check their home country's tax policies and question if they might be on the Section 899 blacklist due to the types of perceived discriminatory foreign taxes at which the Section takes aim. They should be watching this space for the possible impact of Section 899, especially if treaty benefits on which they have relied may be overridden if it is enacted.
In today's world, economies transcend borders, and the interplay between U.S. tax and foreign laws has become increasingly critical. Proposed Section 899 underscores how geopolitical tensions are now shaping tax policy. For global citizens, businesses, and advisors, understanding the evolving dynamics is no longer optional; it's a mandatory component of good planning. Stay informed and proactive in a world where tax grows more complex by the day.
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