Unfair and Unprecedented? How the U.S. “Revenge Tax” Under Proposed Section 899 Targets Foreigners

In May 2025, the U.S. House of Representatives passed a sweeping tax bill nicknamed the “One Big Beautiful Bill Act,” championed by President Trump. Buried within this bill is a controversial provision – proposed Section 899 of the Internal Revenue Code, officially titled “Enforcement of Remedies Against Unfair Foreign Taxes.” Tabloids have dubbed it the “revenge tax” because it’s designed to retaliate against foreign countries that impose certain “unfair” or “discriminatory” taxes on U.S. companies and investors. While Section 899 is not law yet (it awaits Senate approval and the President’s signature), its potential impact is enormous.

This comprehensive article breaks down Section 899 in plain language – so foreign governments, international businesses, and everyday investors can understand what might be coming. We’ll explain what counts as an “unfair foreign tax,” which countries and people could be targeted, how the tax penalties would phase in, which types of income would be affected, how this interacts with tax treaties, and the built-in exceptions and safe harbors. By the end, you’ll see why this proposal has foreign observers sitting up and pondering the consequences if it becomes law.

What Is an “Unfair” or “Discriminatory” Foreign Tax?

Proposed Section 899 squarely targets certain foreign taxes that U.S. lawmakers consider unjustly targeted at U.S. businesses or investors. The bill defines “unfair foreign tax” to automatically include three well-known types of taxes:

• Undertaxed Profits Rule (UTPR): A part of the OECD global minimum tax plan (Pillar Two) that lets countries impose top-up taxes on profits of multinational companies if those profits aren’t sufficiently taxed elsewhere.
• Digital Services Tax (DST): A tax on revenue from digital services (online advertising, user data, etc.), which many countries have adopted specifically impacting large U.S. tech companies.
• Diverted Profits Tax (DPT): A tax designed to prevent companies from shifting profits abroad, famously used by the UK and Australia, often hitting U.S. multinationals

In addition, Proposed Section 899 empowers the U.S. Treasury Secretary to label other foreign measures as “unfair” if they meet certain extraterritorial or discriminatory criteria. In plain terms, a foreign tax could be flagged as “extraterritorial” if it reaches beyond that country’s own borders, taxing a company not just on its own local income but on someone else’s income simply due to an ownership relationship. For example, if Country X taxes a corporation based on profits earned by an affiliated company in the U.S. (even though those profits aren’t made in Country X), that tax is extraterritorial.

A tax is deemed “discriminatory” if it unfairly singles out foreigners or foreign-sourced income. The proposal provides four specific tests for a “discriminatory tax”:

• It taxes income beyond the country’s legitimate source-based jurisdiction. In other words, it reaches income that, under U.S.-style tax sourcing rules, wouldn’t be considered income from that country’s sources or connected to business in that country.
• It’s not based on net income. This means the tax is imposed on gross amounts (revenues, turnover, etc.) without allowing normal expense deductions. DSTs fall in this bucket since they tax revenue, not profit.
• It mostly targets nonresidents or foreign companies. If the tax “applies exclusively or predominantly to nonresident” enterprises – for example, if domestic companies doing the same activities are largely exempt – that’s discriminatory.
• It’s outside of income tax treaties or not treated as an income tax by that country. Some countries design taxes so they aren’t covered by tax treaties (avoiding the normal treaty limits). If a tax is deliberately kept out of treaties or labeled something other than an income tax to sidestep treaty obligations, it’s considered discriminatory.

In short, if a foreign tax disproportionately hits U.S. companies or investors – by design or effect – it’s squarely in Proposed Section 899’s crosshairs. High-profile examples include European digital taxes aimed at Silicon Valley firms, or any new special levy that effectively “will be borne disproportionately by U.S. persons”.

Examples of Targeted Taxes

• France’s Digital Services Tax: A 3% tax on revenues of large digital companies (primarily affecting Google, Amazon, Facebook, etc.). This DST is a poster child for what the U.S. deems an unfair, discriminatory tax on U.S. tech firms.
• UK’s Diverted Profits Tax: The UK charges 25% on profits it thinks multinationals divert away from the UK. U.S. companies like Google have been hit with it, so it would likely count as an unfair tax.
• OECD Globe/UTPR Top-Up Taxes: If Country Y implements the UTPR and starts taxing subsidiaries of U.S. companies because the U.S. hasn’t adopted a global minimum tax, that would be an “unfair foreign tax” in U.S. eyes.

What Taxes Are Not Considered Unfair?

Not every foreign tax is viewed as hostile. Proposed Section 899 carves out specific exceptions to make clear that normal, broadly applied taxes are fine. For example, the proposal explicitly does not target:

• Regular Income Taxes on Local Residents: If Country X taxes its own residents or companies on their worldwide income (like the U.S. does to its residents), that’s not “unfair” – it’s standard.
• Business Income Taxes on Foreign Companies’ Local Operations: Taxing a U.S. company’s profits from doing business in Country X (through a branch or subsidiary) is fair game. Normal corporate income tax or permanent establishment tax in the host country is excluded from the “unfair” label.
• Withholding Taxes on Dividends, Interest, Royalties, etc.: Many countries (including the U.S.) impose withholding on passive income paid to nonresidents. So long as these taxes apply generally and not just to Americans, they’re not considered discriminatory. (However, if a country’s withholding tax regime unfairly exempts locals but hits foreigners, that could be different.)
• Consumption Taxes: Value-added taxes (VAT), goods & services taxes (GST), sales taxes, excise taxes – all these apply to transactions and consumers broadly and are not aimed specifically at U.S. companies. They’re not in Section 899’s scope.
• Per-Unit or Per-Transaction Taxes: Flat taxes charged per item or transaction (for instance, a fixed stamp duty on legal documents, or a $10 fee per airline ticket) are not viewed as unfair since they’re not based on income or targeting U.S. firms.
• Property, Estate, and Gift Taxes: Taxes on owning property or on inheritances/gifts are excluded from being labeled discriminatory.
• CFC Regime Taxes & Consolidation Rules: If a country taxes its residents on income of foreign subsidiaries (Controlled Foreign Corporation rules) or has group tax consolidation and loss-sharing provisions, those are considered normal parts of a domestic tax system, not an anti-U.S. measure.
• Anything Treasury Specifically Excepts: The law gives discretion to the Treasury Secretary to exclude certain taxes if they’re deemed not intended to target U.S. interests. This catch-all allows flexibility – for instance, if a foreign tax technically meets a criterion above but clearly isn’t aimed at U.S. companies, Treasury could spare it.

Bottom line: Proposed Section 899 is aiming at extraordinary foreign taxes seen as singling out U.S. multinationals or investors. Routine taxes that everyone pays (locals and foreigners alike) won’t trigger these U.S. retaliatory measures.

Which Countries Could Be Labeled “Discriminatory Foreign Countries”?

Under the proposal, any country that imposes an “unfair foreign tax” could be designated a “Discriminatory Foreign Country” (DFC). In practice, this list could be long, because numerous U.S. trading partners have enacted the types of taxes described above. For example:

• The United Kingdom has a DST, a DPT, and (potentially) plans for a UTPR – it checks all the boxes.
• Many European Union countries (France, Italy, Spain, Austria, etc.) have digital services taxes and are implementing the global minimum tax rules. They would likely end up on the list.
• Canada has proposed a DST and would be affected if that comes into force.
• Australia has a DPT and is enacting global minimum tax rules.
• Japan, South Korea, New Zealand and others are also rolling out global minimum tax provisions (UTPR) from 2024 onwards.

In fact, as of mid-2025 around 30 countries have adopted a UTPR as part of the OECD agreement, and several have DSTs or DPTs. So a “discriminatory foreign country” list could encompass dozens of nations – including many close U.S. allies – unless those countries repeal or modify those taxes.

Who decides? The designation is ultimately made by the U.S. Treasury Secretary, who is instructed to issue regulations and maintain a list of DFCs. The law envisions Treasury updating this list quarterly (every 3 months) as needed. This implies a dynamic process: countries could be added to the DFC list when they introduce a targeted tax, or removed if they repeal it.

Importantly, Section 899 builds in a delay to give foreign countries a chance to fix things. The punitive measures don’t kick in immediately upon a tax’s passage. Instead, the “applicable date” for a country is defined as the start of the first calendar year after the latest of three events:

• 90 days after Section 899 is enacted in the U.S.,
• 180 days after the foreign country’s unfair tax is enacted, and
• The date the foreign tax actually takes effect.

This somewhat complex rule basically means there’s a grace period. For an existing foreign DST or DPT (enacted years ago), the U.S. would wait at least 90 days after Section 899 becomes law to start penalizing. For a new foreign tax, the U.S. would wait up to 180 days or until it’s effective. This delay is deliberate – it’s meant to allow time for negotiations. In other words, the U.S. is signaling: “We’ll give you a few months to reconsider or adjust your tax before we hit back.”

Key Point: Once a country is on the list as a DFC, all the special penalties of Section 899 (detailed below) apply to any “applicable person” connected to that country. And a country will remain labeled discriminatory until it eliminates the offending tax. If a country removes the unfair tax, the punitive measures would cease (again with possibly a slight delay or administrative process to take them off the list).

Who Are “Applicable Persons” Targeted by Section 899?

Section 899’s retaliatory measures don’t target the countries directly – they target people and entities with a nexus to those countries. The law defines an “applicable person” very broadly. Essentially, it casts a wide net over any foreign individual, business, or even government linked to a discriminatory country. The categories include:

• Foreign Governments of a DFC: If Country X is on the list, then Country X’s government itself is an “applicable person.” This covers the government and any political subdivisions, as well as government-controlled entities like sovereign wealth funds or state pension plans. (Normally, foreign governments enjoy U.S. tax exemptions on certain investments; we’ll discuss how Section 899 changes that later.)
• Foreign Individuals who are Tax Residents of a DFC: For example, a wealthy citizen of Country X living and paying taxes there would be an applicable person. Even if they are not a U.S. citizen or resident, if they earn U.S.-source income (say, from U.S. stocks or property), Section 899 could increase their U.S. tax because they reside in a country with unfair taxes.
• Foreign Corporations Resident in a DFC: Any company incorporated or managed in a listed country counts – unless it’s a “United States-owned” foreign corporation. A “U.S.-owned” foreign corp (per an existing definition in IRC §904(h)(6)) means U.S. persons directly or indirectly own 50% or more of it. Those companies are spared, presumably to avoid penalizing U.S.-headed multinationals that happen to have a foreign subsidiary in the DFC. But a foreign corporation that is based in a DFC and not majority U.S.-owned will be tagged as an applicable person.
• Foreign Private Foundations and Trusts in a DFC: If a private foundation or charitable trust is formed under the laws of a discriminatory country, it falls in the net. Also, any foreign trust where more than 50% of beneficial interests are held by applicable persons (like wealthy individuals of a DFC) is included.
• Foreign Partnerships, Branches, or Other Entities tied to a DFC: The law gives Treasury authority to identify any other entity (like partnerships or unincorporated arrangements) that are clearly connected to a DFC. This is a catch-all to prevent using exotic structures to escape the rules. Even a foreign branch of a company could be counted if appropriate.
• Companies Owned by Applicable Persons: A crucial (and aggressive) rule is that any foreign corporation, regardless of where it’s located, becomes an applicable person if it’s more than 50% owned (by vote or value) by one or more other applicable persons. In plain English, this means if shareholders from a DFC control a company in a third country, that company gets “tainted.” For example, suppose a British corporation (UK = DFC) sets up a subsidiary in Singapore (which itself has no unfair tax). That Singapore company is over 50% owned by an applicable person (the UK parent), so the Singapore company is treated as an applicable person too. This prevents shifting investments to neutral countries; the U.S. will look up the ownership chain. “Every foreign subsidiary of a group parented by a resident in a discriminatory foreign country” would be caught by Section 899’s rules.

In summary, the U.S. is casting a wide and deep net: it doesn’t matter if the income flows through intermediate countries or entities – if ultimately the money is going to a person, company, or government tied to a country with an unfair tax, that person or entity faces these new U.S. tax penalties.

⚖️ A Note on Timing: Once someone is an applicable person, they remain so until their country is no longer a DFC and for the duration of any short gaps. The law closes loopholes by saying a brief change in status (less than 12 months) is ignored. For instance, a company can’t avoid being applicable by temporarily transferring shares to U.S. owners for a few months – a gap under one year won’t shake off the designation.

Retaliatory Tax Hikes: How Section 899 Would Raise U.S. Taxes on Foreigners

Now we get to the bite of this “revenge tax.” If Section 899 is enacted, applicable persons from DFCs will pay higher U.S. taxes on their U.S.-related income. The law doesn’t create brand new taxes; rather, it raises the rates of existing U.S. taxes that already apply to foreign individuals, companies, or governments.

A Gradual Surcharge – 5% a Year, Up to 20%

Unlike a sudden spike, the proposal phases in the tax rate increases over time. Specifically, once the rules kick in for a given country (after the “applicable date”), the U.S. tax rate on an applicable person’s income is **bumped up by an extra 5 percentage points in the first year. Each year thereafter, another +5 points is added, until a maximum of +20 percentage points is reached. It caps out after four years of a country being continuously on the bad list.

Figure: Additional U.S. tax rate surcharge imposed by Section 899 on targeted foreign income, increasing by 5 percentage points each year (up to a 20% maximum).

For example, say the rules begin applying to Country X on January 1, 2026. For income that an applicable person from Country X earns in 2026, the relevant U.S. tax rate would be increased by 5% (5 percentage points). In 2027, it would be 10% higher than normal, in 2028 15% higher, and by 2029 and beyond it would level off at 20% above the normal rate. This escalation is essentially a pressure tactic – the longer a foreign tax stays in place, the more pain the U.S. will inflict, up to a point.

Importantly, there’s a hard cap on the increase: no more than +20 percentage points over the baseline rate. So even if a foreign tax has been around for decades, the U.S. won’t go beyond an extra 20%. The law spells out what that means for key taxes: for most withholding taxes (which are 30% base rate), the max rate becomes 50%; for corporate income tax on foreign firms (21% base), max would be 41%; for the branch profits tax (30% base), max 50%; and for the special 4% tax on foreign private foundations, max 24%.

Which Taxes Would Increase?

Section 899 targets a range of U.S. tax provisions that apply to foreign persons. Here are the main ones that would get hiked for applicable persons from DFCs:

• Nonresident Alien Withholding (FDAP Income): Normally, the U.S. withholds 30% on U.S.-source passive income paid to nonresident aliens or foreign corporations – things like interest, dividends, royalties, or rent (so-called FDAP income, “fixed or determinable annual or periodical” income). Under Section 899, that 30% rate could climb to as high as 50% over time for targeted foreigners. Even if a tax treaty currently reduces the rate, the surcharge is added on top of the treaty rate. For example, if a treaty normally cuts U.S. withholding on interest to 10%, an applicable person might eventually pay 30% (10% + 20% extra) – Gradual Surcharge – 5% a Year, Up to 20%. In an extreme case, a treaty dividend rate of 0% could become 20%. In short, investment income that foreigners take out of the U.S. would be taxed more heavily if their home country is on the list.
• Capital Gains from U.S. Real Estate (FIRPTA): Foreigners who sell U.S. real property interests (like real estate or shares in real-property-heavy corporations) are subject to special rules under the FIRPTA law. Typically, buyers must withhold 15% of the sale price upfront (which acts as a prepayment of the tax on the gain). Section 899 would boost that withholding rate for applicable persons – e.g. to 20%, 25%, up to 35% in later years. So, a foreign investor from a DFC selling U.S. property might see a larger chunk (potentially over one-third) of the gross proceeds withheld and sent to the IRS, rather than 15%. This ensures the IRS can collect the higher tax due on any gain.
• Income Effectively Connected to a U.S. Business (ECI): If a foreign individual or company is engaged in a U.S. trade or business (for example, running a U.S. branch or subsidiary that is not a separate U.S. corporation), their profits are taxed at regular U.S. rates. For corporations, that’s the flat 21% corporate tax; for nonresident individuals, it’s the graduated rates up to 37%. Under Section 899, a foreign corporation’s business profits would face an extra tax up to a total of 41% (21% + 20%) – Gradual Surcharge – 5% a Year, Up to 20%. For nonresident aliens, the bill limits the increase mainly to gains from U.S. real property (which FIRPTA already treats as ECI). In practice, this means a **foreign entrepreneur from a DFC who operates in the U.S. could eventually pay tax akin to a 41% corporate rate or potentially up to 57% if they’re an individual (37% top rate + 20%) – a dramatic hike.
• Branch Profits Tax: Foreign corporations that operate in the U.S. via branches (rather than separate subsidiaries) currently pay not only the regular 21% corporate tax on ECI, but also a 30% “branch profits tax” on any post-tax profits they remit back to the home office – unless a treaty provision overrides the default rate. Section 899 would increase the branch profits tax rate to as high as 50% for branches of companies from DFCs. This effectively penalizes repatriating money out of the U.S. even more. (Many foreign companies may rethink operating as a branch at all if faced with a 50% skim on branch remittances – the proposal consciously levels a huge disincentive here.)
• Foreign Government Investment Income: Normally, the U.S. exempts foreign governments from tax on certain investment income (interest, dividends) under IRC §892 – a gesture of reciprocity and sovereign immunity. However, if a foreign government is from a discriminatory country, Section 899 yanks that exemption. The government is then taxed like any foreign corporation. That means 30% on interest and dividends to start, rising up to 50% with the surcharge. Even income like U.S. Treasury bond interest – usually tax-free for foreign governments – could face up to a 50% tax if the government’s country is on the bad list. This is a striking retaliation: it directly targets government-owned investment funds (like sovereign wealth funds or central banks) of countries with offending taxes.
• Foreign Private Foundations’ U.S. Investments: Foreign private foundations (non-profit entities) normally pay a 4% tax on their U.S. investment income (under a provision analogous to what U.S. private foundations pay). Section 899 would raise that to as high as 24% for foundations based in DFCs – Gradual Surcharge – 5% a Year, Up to 20%.
• Other Withholding Taxes: In addition to the standard 30% FDAP withholding and the 15% real estate withholding, Section 899 explicitly mentions increasing rates under IRC §§1441, 1442, and 1445. These are the withholding tax provisions on payments to foreign persons (1441 for individuals, 1442 for corporations) and on dispositions of U.S. real property (1445). So practically, any withholding obligation a U.S. “withholding agent” has when paying an applicable foreign person – be it interest, dividends, royalties, or real estate sale proceeds – would be at the inflated rates.

To illustrate the impact, here’s a snapshot of some U.S. tax rates now vs. potential future rates under Section 899 for someone from a discriminatory country:

• Dividend from U.S. stock: Currently 30% withholding (or often lower by treaty, e.g. 0% to EU/UK). Under Section 899 after a few years, 50% withholding.
• Interest from U.S. sources: Currently 30% (though many types of interest are exempt under “portfolio interest” rules or reduced by treaty). Section 899 could make taxable interest payments up to 50%. (Portfolio interest that is explicitly tax-exempt by statute would remain exempt – but if a treaty was the only thing making it 0%, then 0% would rise to 20%.)
• Capital gain on U.S. real estate sale: Currently effectively taxed ~21% (capital gain tax) with 15% withheld upfront. Section 899 could push the effective tax higher and require up to 35% withholding at sale – Gradual Surcharge – 5% a Year, Up to 20%.
• Profits of a U.S. branch or partnership: Currently 21% corporate tax + 30% on remittances (Branch Profit Tax) = ~51% combined. This could go to 21%+50% = 71% combined tax on distributed branch profits for a DFC-based company (an eye-watering rate approaching double taxation).
• Payments to foreign government investors (from DFC): Currently 0% on many investments (due to sovereign exemption). Section 899 would impose 30% rising to 50% – a complete reversal of fortune for, say, a DFC’s sovereign wealth fund earning interest in the U.S.

A Tougher BEAT for Foreign-Owned U.S. Companies

Section 899 doesn’t stop at raising tax rates on foreigners – it also strengthens the BEAT (Base Erosion and Anti-Abuse Tax) rules when a U.S. corporation is owned by someone from a discriminatory country. BEAT is a minimum tax that applies to large U.S. companies making deductible payments to foreign related parties, to discourage profit-shifting. Under current law, BEAT only hits very large groups (>$500 million in receipts) and has a rate of 10%.

The proposal creates a “Retaliatory measure 2” (as some analysts call it) which modifies BEAT for certain foreign-owned corporations. If a U.S. corporation is more than 50% owned (directly or indirectly) by applicable persons from a DFC, then two big changes happen:

• Automatic BEAT Applicability: The corporation will be treated as if it meets the BEAT thresholds. In other words, even if it has less than $500 million revenue or a low base erosion percentage, for this rule we pretend those tests are satisfied. This means many smaller or medium-size U.S. subsidiaries of foreign groups (which currently are too small for BEAT) would suddenly fall under BEAT if their foreign parent is from a DFC.
• Harsher BEAT Calculation: The BEAT tax rate for these companies would be 12.5% instead of 10%, and they lose certain carve-outs. Specifically, no preferential credit treatment (research credits etc. wouldn’t reduce BEAT), and certain deductions that normally escape BEAT would be counted. Payments that are usually excluded – like low-margin routine service fees under the “services cost method,” or certain payments that had U.S. withholding tax – would no longer be excluded in calculating BEAT liability. Even amounts that a company capitalizes (instead of expensing), aside from buying tangible or inventory assets, would be treated as if they were deducted, thus counted as base-eroding payments. In short, the BEAT formula is tightened so that more payments to foreign affiliates count, and the minimum tax bites harder.

This BEAT enhancement is effectively a safeguard: if a foreign parent from a DFC tries to strip earnings out of its U.S. subsidiary via interest, royalties, or service fees, the U.S. will recapture more tax via an expanded BEAT. Even groups that today fly under the radar due to size could get hit. For example, a Cayman holding company (owned by, say, investors from a DFC) that has a U.S. operating subsidiary would typically not face BEAT if it’s relatively small. Under Section 899, that U.S. sub could immediately be subject to a 12.5% BEAT on intercompany payments.

Important: These BEAT changes apply to U.S. corporations, so they target inbound investment structures. They wouldn’t affect purely foreign companies with no U.S. subsidiary (those are covered by the withholding and ECI rate increases instead). But for companies that do have a U.S. presence, this ensures they pay a minimum amount of tax despite any planning.

Impact on Tax Treaties and International Law

The aggressive measures in Section 899 raise obvious questions about U.S. tax treaty commitments and international tax norms. Many foreign investors rely on bilateral tax treaties for reduced U.S. withholding rates and protection from discriminatory taxation. How does Section 899 mesh with those treaties?

Treaty Withholding Rates: The proposal makes it clear that treaty benefits will be effectively overridden for targeted countries. The law defines the “specified rate of tax” (the starting point for increases) as including any rate of tax in lieu of the statutory rate. In committee reports, Congress explicitly noted that “if another rate of tax applies in lieu of , such as pursuant to a treaty obligation, that rate is increased by the applicable percentage points. In practice, this means if a treaty between the U.S. and Country X sets a lower withholding rate (or zero) on certain income, Section 899 treats that treaty rate as the base and jacks it up. For example: Under the U.S.-UK tax treaty, dividends qualify for 15% or 5% withholding. Section 899 would consider 15% or 5% as the starting rate and then add up to 5%, resulting in a 20% or 10% tax on those dividends despite the treaty. This is a dramatic move – essentially the U.S. is saying, “We don’t feel bound to honor the treaty’s low rate if your country is misbehaving with its own taxes.”

Such a move could be viewed as a unilateral treaty override. Under international law, a country can override a treaty in domestic law (the U.S. has a “last-in-time” rule where a later statute can supersede an earlier treaty obligation). However, doing so can lead to diplomatic disputes. Many tax treaties also contain a “nondiscrimination clause” which says the host country won’t tax nationals of the other country more harshly than it taxes its own comparable nationals. By imposing a special surcharge only on foreigners from certain countries, the U.S. could be violating those clauses. For instance, Article 24 of the U.S. model tax treaty prevents discrimination against residents of the treaty partner in terms of taxation. Section 899’s designers are essentially ready to breach that principle to retaliate against the other country’s policies. That’s why I consider this a “nuclear option” in the realm of international tax diplomacy — and many others seem to see it the same way.

Tax-Exempt Income vs. Reduced Rates: There is a distinction drawn in the bill: if income is explicitly exempt from tax by U.S. law, Section 899 does not suddenly tax it. For example, portfolio interest (certain interest paid to foreign persons) is wholly exempt under IRC §871(h). The House report clarifies that Section 899 won’t change that – since the tax rate in that case isn’t just “0% by treaty,” it’s “not subject to tax at all” by statute. So portfolio interest remains untaxed for everyone, even if their country is on the list. However, if something is just taxed at a reduced or zero rate under a treaty, that is considered a rate “in lieu” of the normal rate – meaning Section 899 will lift it. The logic: treaties often say “X type of income shall be taxable only in the other country,” effectively making the U.S. rate 0%. Section 899 treats that 0% as a substitute rate that can be increased.

In short, treaty-based exemptions are not safe from this proposal, whereas pure U.S. domestic-law exemptions are respected. This could lead to treaty partners protesting that the U.S. is undermining negotiated benefits.

Foreign Government Immunities: As mentioned, one big effect is on foreign governments and their funds. Under normal circumstances, IRC §892 gives foreign governments (and their controlled entities) an exemption from U.S. tax on passive income like interest, dividends, etc. Section 899 would disable §892 for any government of a DFC. That means, say, the Government of France’s sovereign wealth fund would start paying 30% (and up to 50%) on its U.S. bond interest, whereas previously it paid 0%. While tax treaties sometimes offer additional protections for government entities, many rely on §892. The bill indicates that a foreign government could still claim treaty benefits if available, but those benefits would be subject to the surcharge. Practically, most treaties already give reciprocal exemption to government entities, so Section 899 would override that similarly. This is quite aggressive – it treats a foreign government just like any foreign corporation from a bad-actor country, a stark departure from the usual comity in international taxation.

Diplomatic Fallout: If enacted, these measures might pressure countries to negotiate. The delayed effective date (with that 180-day window) was explicitly put in to “allow time for negotiations.” The U.S. is effectively saying: “We’ll hurt your companies and investors unless you drop those taxes on ours.” Countries may respond by challenging the U.S. in international forums, invoking treaty dispute mechanisms, or potentially retaliating in kind. It sets the stage for trade/tax skirmishes: e.g., the EU might consider U.S. actions a violation of WTO or OECD commitments. So, while Section 899 is domestically focused, it cannot be viewed in isolation – it would reverberate through international economic relations.

Safe Harbors and Exceptions in the Proposal

Given the breadth of Section 899, the drafters included some safe harbors and exceptions to avoid unintended or immediate hardship in certain cases. Here are the key relief provisions:

• Not Officially Listed Yet, No Penalty: If a foreign country has not been formally designated as a “discriminatory foreign country” by the Treasury Secretary, then payers do not apply the higher tax rates to persons from that country. This seems obvious, but it’s a safeguard – there might be a lag between a law’s enactment and Treasury’s listing. Until it’s official, withholding agents can continue at normal rates.
• 90-Day Grace Period for Newly Listed Countries: When a country first gets added to the DFC list, certain payments get a brief reprieve. In particular, for foreign corporations or trusts that become applicable persons solely because of that new listing, the increased withholding rates won’t apply to payments made within 90 days after the listing. This 90-day safe harbor is essentially a short adjustment period for payers and investors to react. For example, if Country Y is declared a DFC on July 1, 2025, then until September 29, 2025, U.S. payers don’t have to tack on the extra tax for payments to companies from Country Y. This prevents a sudden shock and allows administrative adaptation.
• Grace Period for U.S. Withholding Agents (Until 2027): The law recognizes that U.S. businesses (withholding agents) will need to implement these complex rules – checking each payee’s country status, ownership, etc. Mistakes are bound to happen early on. So, through the end of 2026, no penalties or interest will be charged on a withholding agent who fails to withhold the correct increased amount, as long as they made a good-faith effort. In essence, the IRS says: “We’ll give you a year or two to get this right.” If a U.S. bank inadvertently withholds only 30% instead of the required 35% in the early phase, it won’t be punished if it genuinely tried to comply.
• No Double-Counting for BEAT: There’s a provision to ensure that income isn’t penalized twice under overlapping rules. If a payment is already taxed via normal withholding (or disallowed somewhere else), the IRS will issue guidance to avoid double-counting the same item for the expanded BEAT calculation. This is a technical point, but it matters to avoid an absurd result where a foreign payment is both non-deductible for BEAT and also taxed via withholding uplift.
• Secretary’s Discretion for Exceptions: Treasury has latitude to exempt certain categories of persons or taxes from the Section 899 regime. For example, if there’s a foreign pension fund that technically falls under the definition but Treasury deems it shouldn’t be hit, they could carve that out by regulation. Or if a foreign tax is borderline but not intended to target U.S. companies, Treasury could decide not to treat it as “unfair.” This discretionary power means the executive branch can fine-tune the law’s application and potentially grant relief in edge cases or as part of diplomatic negotiations.

Conclusion: A New Era of Tax Retaliation?

The proposed Section 899 is a bold and controversial tool. If enacted, it would mark a new era where the U.S. actively retaliates against other countries’ tax policies by targeting their nationals’ U.S. income. In many ways, it’s unprecedented – the U.S. has long complained about foreign digital taxes and similar measures, but this would be the first time it swings a big stick in response. Foreign governments and multinational companies are watching this development closely.

For foreign investors and businesses, the prospect of significantly higher U.S. taxes is alarming. It could deter investment into the U.S. from affected countries or force businesses to restructure to avoid the sting. For example, a foreign pension fund might scale back U.S. investments if its return will be sliced by a 50% withholding tax. Companies in listed countries might route U.S. operations through allies’ jurisdictions (though Section 899’s ownership rules try to block that).

For policymakers abroad, Section 899 is essentially a challenge: “If you tax us, we’ll tax you back – harder.” Countries with digital services taxes or plans for the Pillar Two UTPR will need to evaluate if keeping those measures is worth their companies losing U.S. tax benefits. The delayed effective dates provide a window for negotiation. We may see intense diplomatic discussions and possibly deals where countries agree to drop certain taxes (like DSTs) in exchange for the U.S. not enforcing these retaliatory provisions. In fact, U.S. officials have hinted this is the goal – to pressure foreign governments into scrapping taxes viewed as unfair to American interests.

As of this writing, Section 899 has passed the House but remains under Senate review. Its fate is uncertain – it has significant international ramifications, and some U.S. lawmakers worry about trade blowback or harm to financial markets. Foreign observers, especially in Europe, Canada, and other affected regions, should stay tuned. If this “revenge tax” becomes law, it will usher in a more confrontational phase of international tax policy.

One thing is clear: even the proposal of Section 899 has made foreign governments sit up and ponder the consequences. It signals that the U.S. is prepared to use its large economic leverage (the attractiveness of U.S. markets and investments) as a bargaining chip to defend its companies from overseas tax grabs. Whether that strategy succeeds or triggers a wider tax war remains to be seen. For now, multinational businesses and international investors should plan ahead – identify exposures to U.S. tax under these rules, review any tax treaties, and monitor legislative updates. The era of benign tax relations may be giving way to a sharper-edged dynamic where taxes become a geopolitical tool, and Section 899 is at the forefront of that shift.