Tax professionals expect a proposed addition to the Tax Code featured in the House-passed One Big Beautiful Bill Act (OBBBA, H.R. 1) that would retaliate against “unfair foreign taxes” will prove difficult for impacted companies to comply with, pending revisions during Senate negotiations.
Policy backdrop.
The OBBBA would create Code Section 899, borne from Republican opposition to the Organization for Economic Development’s (OECD) two-pillar global tax model in various stages of implementation among 140 non-U.S. tax jurisdictions.
For House taxwriters and the Trump administration, the prevailing theory is that U.S. multinational enterprises (MNEs) would suffer economic disadvantages (such as exposure to double taxation) under the OECD rules. As more countries adopt the OECD’s approach to jurisdictional taxing rights in an increasingly digital economy and deterring the profit-shifting ‘race to the bottom,’ the U.S. under President Trump is a notable holdout.
One objective of the OBBBA is to extend and enhance the international tax regime enacted during Trump’s first presidential term in the Tax Cuts and Jobs Act (TCJA). The TCJA’s global intangible low-tax income (GILTI), base erosion and profit-shifting (BEAT), and foreign derived intangible income (FDII) provisions conflict with the OECD pillars, conservative lawmakers have maintained, especially the 15% global minimum tax known as Pillar Two.
Section 899 and ‘applicable’ definitions.
The OBBBA proposal underscores the current administration and congressional Republicans’ position to further distance the U.S. from the OECD. Proposed Section 899 as passed by the House acts as a tax surcharge on non-residents connected with countries that impose certain laws considered detrimental to U.S. taxpayers.
These generally include digital service taxes, the Pillar Two undertaxed profits rule (UTPR), and other “discriminatory” or “extraterritorial” taxes. Section 899 would increase certain tax rates by a number of percentage points for an “applicable person” for tax years beginning after one of these “unfair” taxes take effect.
Robert Christoffel of Saul Ewings told Checkpoint that Section 899 can be thought of as a “revenge tax.” From an enforcement perspective, it is “helpful” to “some extent” that it is “self-executing,” he said. “It specifically references” the types of taxes that will “trigger this revenge tax.”
Still, the Treasury Department will need to fill in any gaps left by the statute. Christoffel questioned if the text could be as granular as it needs to be, “rather than leaving that” for guidance to pin down.
As put by Deloitte’s Harrison Cohen during a June 11 webcast on the proposal, “you’re only an applicable person because you’re a resident of, or somehow associated with, a discriminatory foreign country. And a country is a discriminatory foreign country only if it has an unfair foreign tax.”
For U.S. or foreign companies subject to the BEAT, “if it’s not publicly held and more than 50% of its stock is owned by applicable persons, then it will have to compute its BEAT using worse rules than everybody else,” Cohen explained. He added that Section 899 also overrides tax treaty protections, meaning an applicable person connected with a foreign country with which the U.S. has an existing tax treaty would not benefit from such an agreement and thus would pay the higher statutory rate.
Because the proposal introduces several new definitions involving the word “applicable,” it is “easy to get lost” when parsing out which entities or tax types would be in scope.
Challenges.
Later in the Deloitte presentation, David Charlton told viewers the “operational impacts” of Section 899 are “very broad” and will affect an account holder’s “entire life cycle… from onboarding, determining their tax profile, monitoring the in-scope discriminatory foreign countries, and the timing and the application of the withholding rates and the reporting.”
Identifying an applicable foreign person, for instance, invites questions about residency. “Well, how are we defining residency? Would this include tax residency? You can have multiple tax residencies,” said Charlton. Forms W-8, he noted, do not currently track this information.
This is also true of information regarding non-public corporations majority owned by applicable persons or trusts with the majority of beneficial interests held by applicable persons, Charlton added. He said it is “likely” there would be an update to Form W-8 or similar forms, which has ramifications on a company’s due diligence procedures and onboarding.
“Additional data will likely need to be collected and categorized of your account holders,” said Charlton. “You may even have to… look and track the residency information for your limited partnerships.”
There is also the matter of the Treasury Department’s forthcoming list of discriminatory foreign countries. It is unknown where the list will be published or how often it would be updated. Charlton wondered if a country could be on the list in one fiscal quarter and be taken off the next.
“This could change quite frequently, so you’re going to need to have a robust set of controls to monitor and track this published list and create real time, systemic solutions,” he suggested. To that point, he continued, tracking the effective dates of in-scope taxes will also require changes to “transactional platforms to adjust withholding in alignment with changes to the Treasury list.”
Systems will need to “be nimble and scalable” to account for these “moving targets,” Charlton said, as well as withholding information of entities “that were never in scope for withholding” because the Code Sec. 892 exemption “doesn’t apply.” Pension funds, sovereign wealth funds, and private foundations are some examples.
Changes and likelihood of passage.
Another Deloitte speaker, Jason Smyczek, said he was initially “skeptical” about the changes of Section 899’s enactment since it originated in the House.
But based on what he has heard from senators as recently as Wednesday morning is that the proposal will remain included in the OBBBA. “Of course, there are a number of affected companies and industry groups speaking to their senators about the impacts of Section 899.”
One example is the Investment Company Institute (ICI), which said in a statement that Section 899 “is currently written in a manner that could limit foreign investment to the US-a key driver of growth in American capital markets that ultimately benefits American families saving for their futures.” ICI requested that the Senate make revisions to more narrowly targeted.
Smyczek indicated one potential change could be a delayed effective date. Otherwise, the provisions would take effect as soon as the Treasury list is published. “But right now, our best guess is that Section 899… seems likely to survive the Senate in some form.”
PwC Principal Nita Asher agreed that delaying when Section 899 takes effect may be necessary “not only for negotiations to occur, but actually for procedures to be put into place to help with the enactment and the application of” any new rules that are retained in the Senate version.
Asher said as much on Monday’s episode of the firm’s “Policy On Demand” web series. Companies are already “modeling to see how the increase to the specified rates under the substantive tax rules, the withholding tax rules, and also the BEAT modifications might apply to their structure.”
Companies are also modeling Section 899 as a “negotiation tool” and are preparing possible talking points to be shared with their respective tax authorities to ultimately avoid being associated with any unfair taxes, Asher said.
Additional reporting by Maureen Leddy, Checkpoint.
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