House tax bill would impose taxes on cross-border transactions

New section 899 could substantially increase tax on inbound investment

June 27, 2025

The One Big Beautiful Bill Act became law on July 4, 2025. RSM's Washington National Tax team continues to provide focused tax insights to help you move forward with confidence.  

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International tax
Business tax Policy Tax policy Pillar two

This article, originally published June 13, 2025, has been updated to reflect that Republican congressional leaders on June 26 announced they would remove the section 899 proposal from the broad taxation-and-spending package after the secretary of the U.S. Department of the Treasury announced a tax agreement with G7 countries.   

A new section of tax code approved by U.S. House of Representatives on May 22 is designed to target inbound investment from countries that have in force an “unfair foreign tax” that applies to U.S. persons and their controlled foreign corporations (CFCs).

The One Big Beautiful Bill Act (OBBBA) proposes the creation of section 899, titled “Enforcement of remedies against unfair foreign taxes.” If the legislation is enacted, it could have significant, complex repercussions for inbound business activities and investment from impacted countries, including:

  • Increased tax rates on various classifications of income
  • Modified application of tax treaties
  • More stringent application of the base erosion and anti-abuse tax (BEAT)

However, Republican congressional leaders on June 26 announced they would remove the section 899 proposal from the broad taxation-and-spending package after the secretary of the U.S. Department of the Treasury announced a tax agreement with G7 countries.  


Unfair foreign taxes and section 899

Proposed section 899 is designed to put pressure on foreign countries that have enacted “unfair foreign taxes” to repeal those taxes or provide an exemption for U.S. persons and their controlled foreign corporations.

As drafted in the legislation the House approved, section 899 would generally apply to governments, individuals and entities that are resident in a country that has an “unfair foreign tax.” It would also apply to entities resident in countries that do not have an “unfair foreign tax” in effect but which are controlled by residents of a country that has an “unfair foreign tax.”

The House-approved legislation—also known as H.R. 1—defines an “unfair foreign tax” as including a digital service tax (DST), a Pillar Two undertaxed profits rule (UTPR), and a diverted profits tax (DPT). DSTs, UTPRs and DPTs would automatically be classified as unfair foreign taxes if they apply to U.S. persons, including a trade or business of a U.S. person and their CFCs, without further action needed by Treasury to implement section 899.

Other types of foreign taxes could also be classified as an “unfair foreign tax” if Treasury determines that a foreign tax is discriminatory or extraterritorial and was enacted with a public or stated purpose indicating that the tax will be borne disproportionately by U.S. persons. 

The House-approved legislation does not provide a definition of a DST. However, the Joint Committee on Taxation issued a report on H.R. 1 that describes a DST based on the definition in the Organisation for Economic Co-operation and Development’s (OECD) proposed Multilateral Convention on Pillar One (MLC).

The classification of a tax as a DST under the MLC is determined by whether the tax is imposed based on the location of users or other market-based factors, is applicable only to non-residents, and is generally not considered a covered tax in treaties. Value-added taxes (VAT), transaction taxes, and anti-abuse measures are generally not considered DSTs under the MLC.

H.R. 1 also provides a list of taxes that would not be considered “discriminatory” or “extraterritorial” taxes. Not surprisingly, the exceptions include the following:

  • Generally applicable net income taxes imposed on residents
  • Withholding taxes imposed on investment income
  • Income inclusions from CFCs
  • Taxes imposed on income that is attributable to a trade or business conducted in the foreign country
  • Sales and VAT taxes
  • Taxes on real or personal property located in the country

A country with a DST, DPT, UTPR or other “unfair foreign tax” would be considered a “discriminatory foreign country.”

Applicable persons

Section 899 would apply to “applicable persons,” which are defined in H.R. 1 as including the following:

  • A government of a discriminatory foreign country (as defined in section 892 to include controlled entities of a foreign government)
  • An individual (other than a U.S. citizen) who is tax resident in a discriminatory foreign country
  • A foreign corporation which is tax-resident in a discriminatory foreign country (other than a “U.S. owned foreign corporation”)
  • A private foundation created or organized in a discriminatory foreign country,
  • Any privately held foreign corporation that is not tax-resident in a discriminatory foreign country if more than 50% of the voting power or value of the corporation is owned by other applicable persons
  • Any trust the majority of the beneficial interests of which are held (directly or indirectly) by applicable persons
  • Foreign partnerships, branches, and other entities identified by Treasury as applicable persons

RSM US insights: The scope of section 899

A foreign corporation that is a “U.S.-owned foreign corporation” generally would not fall within the scope of proposed section 899, even if it is resident in a discriminatory foreign country.

A “U.S.-owned foreign corporation” for this purpose is defined by cross-reference to section 904(h)(6) as any foreign corporation if 50% or more of the voting power or value of its shares are held (directly or indirectly within the meaning of section 958(a)) by U.S. persons. U.S.-owned foreign corporations generally include CFCs (other than CFCs based on constructive ownership), and 50% or more U.S.-owned foreign corporations that are not CFCs.

Unlike the rules for determining CFC status, which consider U.S. owners only to the extent they hold at least 10% of the voting power or value of the foreign corporation, a “U.S. owned-foreign corporation” also takes into account U.S. shareholders that own less than 10% of the voting power or value of the foreign corporation.

For example, assume a foreign corporation organized in a discriminatory foreign country has 30 investors with equal shares, 20 of whom are U.S. investors and 10 of whom are foreign investors resident in a discriminatory foreign country. The foreign corporation would not fall within the scope of proposed section 899, even though it is organized in a discriminatory foreign country and is not classified as a CFC.

This definition could allow certain fund structures to escape the application of section 899 if a sufficient percentage of U.S. persons own an interest in a foreign holding company, for example.

However, included within the scope of section 899 are foreign corporations (other than publicly held companies) that are not organized in a discriminatory foreign country but are owned more than 50% (directly or indirectly) by persons resident in a discriminatory foreign country.

For example, assume a foreign corporation which is not organized in a discriminatory foreign country has 30 investors with equal shares, 20 of whom are resident in a discriminatory country and 10 of whom are U.S. investors or foreign investors who are not resident in a discriminatory foreign country. The foreign corporation would be considered an “applicable person” and would fall within the scope of section 899.

Investment funds will need to perform a thorough review of the ownership structures regardless of where corporations are resident to determine the application of section 899.

Increase in tax rates

Applicable persons that fall within the scope of proposed section 899 would be subject to tax rate increases on fixed, determinable, annual, or periodical (FDAP) income; effectively connected income (ECI); the branch profits tax, and the section 4948(a) tax on foreign private foundations.

The tax rates would increase by 5% every year the “unfair foreign tax” in the relevant foreign jurisdiction is applicable to U.S. persons or their CFCs. Nonresident individuals, foreign corporations, and governments would be subject to the increased rates on gains from the disposition of U.S. real property. However, the rate increases on ECI derived from an active U.S. trade or business would not apply to nonresident individuals.

The 5% annual increase is capped at 20% above the statutory rate (determined without regard to reduced treaty rates).

RSM US insights: Tax rate caps

Consequently, tax rates would be capped as follows:

  • The FDAP and branch profits tax would be capped at 50% (the statutory rate of 30% plus 20%)
  • The ECI tax applicable to corporations would be capped at 41% (the statutory rate of 21% plus 20%)
  • The section 4948(a) tax on foreign private foundations would be capped at 24% (the statutory rate of 4% plus 20%)

The rate increases apply both to the substantive tax liability under sections 871, 881, 882, and 884, and the withholding tax rates under sections 1441, 1442, and 1445.

RSM US insights: Withholding tax rates

The withholding tax rates on FDAP could increase from 30% up to 50%, and withholding on a disposition of U.S. real property could increase from 15% up to 35%.

However, the House-approved legislation does not expressly apply the rate increases to partnership withholding on ECI under section 1446. 

The 5% annual rate increase would be applied either to the statutory rate of tax “or any rate of tax appliable in lieu of the statutory rate,” according to the legislation.

Although the approved version of H.R. 1 excludes language from prior drafts that provided explicit language to override U.S. tax treaties, the reference to “any rate of tax in lieu of the statutory rate” is generally understood as referring primarily to rates that are reduced under an applicable U.S. tax treaty.

The change was likely intended to address concerns regarding the so-called Byrd rule, which restricts the House’s ability to pass legislation that overrides U.S. tax treaties that fall within the primary jurisdiction of the Senate Finance Committee.

RSM US Insights: Section 899 and the application of treaties

It is expected that taxpayers eligible for treaty benefits would initially apply the treaty rate to the income at issue and then layer on the annual 5% rate increases imposed by section 899.

For example, if a taxpayer qualifies under a treaty for a 0% rate on dividends, the tax rate on dividends would be 5% in the first year that section 899 applies. In the second year, it would increase to 10%. After 10 years, the rate would be capped at 50%.

Although it seems relatively clear that section 899 is intended to override the lower treaty rates on investment income—such as dividends, interest, and royalties—it is not clear whether the rate increases would also apply where income is exempt under a treaty based on a special classification of the income or the nature of the investors.

Certain exemptions under a treaty are more clearly imposing conditions on the ability of the U.S. to assert its jurisdiction to tax the income, rather than a rate at which a tax is applied. It may be reasonable to interpret section 899 as not eliminating those conditions.

For example, it is unclear if section 899 will remove the permanent establishment protection for business profits, the exemption on certain pension benefits, or the residence only taxing rights on “other income” that is not otherwise addressed in the treaty.

Exemptions provided under the Code that either make a transaction nontaxable or exempt the income from U.S. tax (other than the section 892 exemption for foreign governments) are not addressed in the draft legislation and are expected to continue to apply if section 899 is enacted.

However, H.R. 1 expressly makes the section 892 exemption for investment income earned by a foreign government inapplicable to a “discriminatory foreign government” and its controlled entities. This would subject a “discriminatory foreign government” and its controlled entities not only to the statutory rates of tax (or reduced treaty rates) but also to the 5% annual increases on those rates.

For example, a sovereign wealth fund organized by a “discriminatory foreign government” may be subject to the 30% statutory rate on U.S. dividends, plus an annual 5% increase above the statutory rate. However, if that sovereign wealth fund qualifies for an exemption on the dividends under a U.S. treaty, the rate would start at 5% and could take 10 years to get to the 50% rate cap.

RSM US insights: Exemptions

Inbound investors may continue to benefit from exemptions such as:

  • The section 897 exceptions on U.S. real property gains for domestically controlled real estate investment trusts (REITs) and foreign pensions
  • The sections 871(h) and 881(c) exemption for portfolio interest

‘Super BEAT’ provisions

The House-approved section 899 would modify the section 59A base erosion anti-abuse tax (BEAT) for privately held U.S. corporations that are more than 50% owned (directly or indirectly) by “applicable persons.” The modifications to BEAT would also apply to foreign corporations with ECI that are more than 50% owned (directly or indirectly) by “applicable persons,” regardless of whether the foreign corporation is organized in a “discriminatory foreign country.”

Thus, the application of these "Super BEAT" rules depends on the ownership of the company making the payment, instead of—as would seem more intuitive—the residency of the beneficial owner of the payment. Consequently, U.S. corporations, and foreign corporations with ECI, which are subject to the “Super BEAT” rules may have a BEAT liability based on payments made to persons who are not classified as “applicable persons.” 

These types of corporations would be subject to BEAT regardless of whether they satisfy the $500 million gross receipts and 3% base erosion percentage tests, which normally exclude from the scope of the BEAT small and medium-sized taxpayers, and taxpayers that do not make significant deductible payments to related foreign persons.

For example, assume that persons from Switzerland, Malaysia, and South Korea invest equal amounts in a fund, organized as a U.S. partnership, through a U.S. corporation that functions as a so-called blocker corporation for ECI. The U.S. blocker corporation is funded with a combination of debt and equity.

Assume further that Switzerland does not have a DST and UTPR, and that South Korea and Malaysia have either a DST or UTPR in force that does not provide an exemption for U.S. persons and their CFCs. The U.S. blocker corporation would likely be subject to the “Super BEAT” rules, and the interest payments it makes could be considered base eroding payments, which essentially subjects the U.S. corporation to an additional tax of 12.5%.

Alternatively, if a separate U.S. blocker corporation is set up for the Swiss investor, that U.S. blocker would not be subject to the Super BEAT rules under section 899.

RSM US insights: The expanding applicability of BEAT

Corporations subject to the “Super BEAT” rules would be required to apply BEAT without the benefit of the service cost method, which normally excludes from the scope of the BEAT deductible payments that can be charged out at cost or a markup of 7% or less under section 482 principles. This change could make fees paid by U.S. corporations to foreign affiliates for routine services subject to the BEAT.

For example, assume a UK corporation headquartered in the UK establishes a U.S. subsidiary to conduct local business activities and the U.S. subsidiary pays the UK headquarters for back office administrative work. The payments the U.S. subsidiary makes to its UK parent may now be subject to the BEAT.

Deductible FDAP payments (i.e., interest and royalties) would also be subject to the full amount of additional tax imposed by the BEAT regardless of whether the payments are subject to FDAP withholding. Under the regular BEAT rules, FDAP payments that are subject to full withholding at 30% are not considered base eroding payments.

The proposed “Super BEAT” rules would also treat a cost that is capitalized to an asset as a base eroding payment if it would have been a base eroding payment had it not been capitalized. However, the purchase price of depreciable/amortizable property and inventory are excluded from the scope of this rule.

Additionally, corporations subject to the “Super BEAT” rules would pay a BEAT tax of 12.5% on base eroding payments, not the reduced 10% rate that is in the OBBBA which would apply to other taxpayers.

Applicable date

The House-approved section 899 provisions that increase the substantive rates of tax (sections 871, 881, 882, 884, and 4948), deny the section 892 exemption for foreign governments, and impose the “Super BEAT” rules would apply on the first day of the first calendar year beginning on or after the latest of the following dates:

  • 90 days after the date section 899 was enacted
  • 180 days after the date the unfair foreign tax was enacted
  • The first date that an unfair foreign tax begins to apply

If section 899 is enacted before October 2025, these provisions may begin applying starting Jan. 1, 2025, for countries that have a DST, UTPR, or DPT in force on Jan. 1, 2026, that applies to U.S. persons or their CFCs. If section 899 is not enacted until later in 2025 or 2026, section 899 may not apply until 2027.

Section 899 removed from tax package

While the U.S. Senate worked to finalize its version of the taxation-and-spending bill, Treasury Secretary Scott Bessent on June 26 announced a tax agreement with G7 countries, about which he did not disclose details.

As a result of that agreement, he recommended that Congress remove the proposed section 899 from its legislation. Republican congressional leaders subsequently announced they would heed that recommendation.

Republican leaders are aiming to enact the taxation-and-spending bill by July Fourth.

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