The House Ways and Means Committee's budget reconciliation bill (the Bill) approved May 14, 2025, would introduce new IRC Section 899, which would increase federal income tax and withholding tax rates and expand the application of the BEAT rules on certain foreign-parented groups. It would also apply to inbound investors, including certain individuals, foreign governments, private foundations, certain trusts, and certain foreign partnerships. It would apply to residents of countries with certain "unfair foreign taxes," including the undertaxed profits rule (UTPR), digital services tax (DST), and diverted profits tax (DPT), along with certain other taxes as determined by the Treasury Department and IRS.

Proposed Section 899

In creating a new IRC Section 899, the Bill combines and modifies legislation introduced earlier this year by House Ways and Means Committee Chairman Jason Smith (R-MO) (H.R. 591 or Smith Bill) and Rep. Ron Estes (R-KS) (H.R. 2423 or Estes Bill). New IRC Section 899 would increase a variety of taxes, including withholding taxes, on an "applicable person" by an "applicable number of percentage points." It would also significantly expand the application of BEAT to certain corporations that are applicable persons. Key provisions of the new IRC Section 899 are discussed in detail below.

Definition of "applicable person"

An "applicable person" would include:

• Any government (within the meaning of IRC Section 892) of any discriminatory foreign country
• Any individual (other than a US citizen or resident) who is a tax resident of a discriminatory foreign country
• Any foreign corporation (other than a US-owned foreign corporation, as defined in IRC Section 904(h)(6)) that is a tax resident of a discriminatory foreign country
• Any private foundation (within the meaning of IRC Section 4948) created or organized in a discriminatory foreign country

An "applicable person" would also include any non-publicly held foreign corporation where more than 50% of its vote or value is owned (within the meaning of IRC Section 958(a)) by applicable persons. Therefore, any non-publicly held corporation that is majority-owned by applicable persons, either directly or indirectly, would itself be treated as an applicable person (a Majority-Foreign-Owned Non-Public Corporation). An "applicable person" would also include any trust with a majority of beneficial interests held (directly or indirectly) by applicable persons, as well as foreign partnerships, branches, and any other entities identified by the Secretary with respect to a discriminatory foreign country.

Definition of "discriminatory foreign country"

The Bill defines the term "discriminatory foreign country" as any foreign country with one or more "unfair foreign taxes." The term "foreign country" includes a foreign country, a political subdivision, a dependent territory, or a possession thereof, but excludes any possession of the United States. A "tax" would include any increase in tax whether effectuated by an increase in the rate or base of a tax, a denial of deductions or credits, or otherwise.

The term "unfair foreign tax" expressly includes three categories of taxes: UTPRs, DSTs, and DPTs. Although the Bill does not define each of those terms, the accompanying JCT Report¹ provides an overview of UTPRs and DSTs and cites the United Kingdom and Austria as examples of countries with DSTs. In addition, the definition of unfair foreign taxes includes certain extraterritorial or discriminatory taxes but only to the extent provided by the Secretary. The Bill defines "extraterritorial tax" and "discriminatory tax."

Increased rates of tax

For any applicable person, the Bill would increase tax rates currently provided in certain provisions. Specifically, the Bill would require an increase by an applicable number of percentage points for the following "specified rates of tax":

• The 30% rate imposed on "fixed or determinable annual or periodical gains, profits, and income" (FDAP income), certain capital gains, and certain other types of US-source income of a nonresident alien individual or foreign corporation
• The individual income tax rates imposed on a nonresident alien individual subject to tax on income that is effectively connected with the conduct of a US trade or business (ECI), but only to the extent imposed on gains from the disposition of a US real property interest (USRPI)
• The 21% rate corporate income tax imposed on a foreign corporation's ECI
• The 30% rate imposed on dividend equivalent amounts of a US branch (that is, branch profits tax)
• The 4% rate imposed on US-source gross investment income of foreign private foundations

The tax rate increase would correspond to the "applicable number of percentage points" in effect for the relevant discriminatory foreign country during the taxpayer's tax year. The "applicable number of percentage points" generally means, for any discriminatory foreign country, 5 percentage points during the first one-year period beginning on the applicable date, increasing by an additional 5 percentage points for each one-year period thereafter. The Bill includes a cap on such increases so that the rate increases would not exceed the relevant statutory rate by more than 20 percentage points.

The term "applicable date," with respect to a discriminatory foreign country, means the first day of the first calendar year beginning on or after the latest of (i) 90 days after the date of enactment of new IRC Section 899, (ii) 180 days after the date of enactment of the unfair foreign tax that causes the country to be treated as a discriminatory foreign country, or (iii) the first date that the unfair foreign tax of that country begins to apply.

If more than one applicable number of percentage points were in effect during the taxpayer's tax year, the applicable number of percentage points would be determined by using a weighted average, based on the number of days that each applicable number of percentage points was in effect during the tax year. For this purpose, the applicable number of percentage points would be treated as zero for periods before the applicable date and also after the taxpayer ceases to be an applicable person.

Given that the substantive tax liability of a foreign person is generally collected via withholding tax, the Bill would also require an increase in certain withholding taxes. Specifically, the following rates of tax would increase by the applicable number of percentage points in effect on the date of payment or disposition:

• The 30% rate that is specified in IRC Sections 1441(a) or 1442(a) and applicable to payments of FDAP income, certain capital gains, and certain other types of US-source income made to an applicable person
• The 15% rate that is specified in IRC Section 1445(a) and applicable to dispositions of USRPI by an applicable person
• The rate that is specified in IRC Section 1445(e) and applicable to certain dispositions, distributions, or other USRPI transactions involving or connected to an applicable person

In addition, the rates of withholding under IRC Section 1446(a) on effectively connected taxable income allocable by a partnership to foreign partners would increase. If another rate of tax applies in lieu of the statutory rate, then that rate of tax would be subject to the increase under the Bill. Although the Bill does not refer to tax treaties, the JCT Report explains that, if another rate of tax applies in lieu of the statutory rate of tax, "such as pursuant to a treaty obligation of the United States," the other rate would increase by the applicable number of percentage points. That is, the other rate would continue to increase by 5 percentage points every year up to the statutory rate (rather than the rate applicable in lieu of the statutory rate) plus 20 percentage points. As a result, for example, the tax rate applicable to FDAP income could increase to 50% to the extent that a country remains a discriminatory foreign country, notwithstanding a lower rate provided in an applicable US income tax treaty. If a taxpayer is an applicable person with respect to more than one discriminatory foreign country, then the highest applicable number of percentage points in effect would apply.

Expansion of BEAT with respect to certain corporations

The Bill would expand the application of BEAT to Majority-Foreign-Owned Non-Public Corporations, including US subsidiaries of certain foreign-parented groups.

For those corporations, BEAT would apply as if the corporation were to meet the average annual gross receipts test under IRC Section 59A(e)(1)(B) and the base erosion percentage test under IRC Section 59A(e)(1)(C) to be an applicable taxpayer subject to BEAT. However, the corporation would also have to meet the other requirements of an applicable taxpayer under IRC Section 59A(e)(1)(A), meaning it is not a regulated investment company, a real estate investment trust, or an S corporation.

The Bill would also expand the application of the BEAT rules for those corporations when calculating the base erosion minimum tax amount (BEMTA). Currently, for tax years beginning on or before December 31, 2025, the BEMTA generally equals the excess, if any, of 10% of the applicable taxpayer's modified taxable income (MTI) over its regular tax liability for the tax year, reduced by certain credits. If enacted, new Section 899 would increase the BEAT rate from 10% to 12.5%, and reduce the regular tax liability by the sum of all credits allowed under Chapter 1 of the Code. Thus, under the Bill, all income tax credits (including the research credit under IRC Section 41(a)) would reduce regular tax liability and therefore increase the BEMTA.

For these corporations, the Bill would also eliminate certain exceptions to base erosion payments for (i) amounts taxed under IRC Sections 871 or 881 and withheld under IRC Sections 1441 or 1442, and (ii) amounts paid or accrued for services eligible for the services cost method (SCM) under IRC Section 482.

Finally, if any amount (other than the purchase price of depreciable or amortizable property or inventory) paid or accrued by such corporation to a foreign related party would have been a base erosion payment but for the fact that the taxpayer capitalized it, then, the amount would be treated as if it had been deducted rather than capitalized for purposes of calculating the taxpayer's base erosion payments and base erosion tax benefits.

Application to foreign governments

In addition to treating a government (within the meaning of IRC Section 892) of a discriminatory foreign country as an applicable person, the Bill would preclude IRC Section 892(a) from applying to an applicable person that is a government of a discriminatory foreign country. Under IRC Section 892(a), the income that foreign governments receive from certain investments in the US and certain interests on deposits in US banks is excluded from gross income and exempt from US taxation.

Exemptions for portfolio interest, bank deposit interest, interest-related dividends, and qualified foreign pension funds

The Bill does not appear to impact types of income to which "no tax shall be imposed," such as the portfolio interest exemptions under IRC Sections 871(h) and 881(c), the exemptions for bank deposit interest in IRC Sections 871(i) and 881(d), and the exemptions for interest-related dividends under IRC Sections 871(k)(1) and 881(e)(1). Similarly, the IRC Section 897(l) exemption for qualified foreign pension funds does not appear to be affected.

Transactions related to dispositions and distributions of USRPIs

The Bill would also include any disposition or distribution of a USRPI under IRC Sections 897 and 1445 (the FIRPTA rules) by an applicable person within the scope of the new IRC Section 899.

IRC Section 897 generally treats a foreign person's gain or loss from the disposition of a USRPI as effectively connected with a US trade or business (ECI). IRC Section 1445 implements the substantive rules of IRC Section 897 by imposing a withholding tax mechanism. IRC Section 1445(a) generally imposes a 15% withholding tax on the amount realized from the disposition of USRPIs by foreign persons. Additionally, IRC Section 1445(e) requires withholding on specific transactions, including:

• Dispositions or distributions of USRPIs by certain partnerships, trusts and estates
• Distributions of USRPIs by foreign corporations
• Certain distributions by domestic corporations that are US real property holding corporations

Therefore, any FIRPTA withholding that is required under IRC Section 1445(a) or 1445(e) (or any tax rate applicable in lieu of the statutory rate) on a disposition or distribution of a USRPI would increase by the applicable number of percentage points.

Finally, the Bill would require an increase in the tax rate applicable to the ECI of a nonresident alien individual only to the extent the tax was to be imposed on gains from the disposition of a USRPI.

Effective date

The JCT Report notes that the Bill would be effective on the date of enactment. Once enacted, the proposed modifications to BEAT and the rate increases on taxes other than withholding taxes (that is, the rate increases on FDAP income, ECI, the branch profits tax, and the excise tax on foreign private foundations) would apply to tax years beginning after the later of (i) 90 days after the date of enactment of new IRC Section 899, (ii) 180 days after the date of enactment of the unfair foreign tax that causes the country to be treated as a discriminatory foreign country, and (iii) the first date that the country's unfair foreign tax begins to apply.

Increases in the rate of tax withholding would apply for each calendar year beginning in the period the person is an applicable person, so new withholding rates would go into effect on January 1 following the applicable date. In addition, the application of the increased withholding rates would be subject to two safe harbors included in the Bill. First, the rate increases on withholding tax would not apply if the discriminatory foreign country with respect to which a person is an applicable person were not listed in the guidance issued by the Secretary. For certain foreign corporations or trusts that are applicable persons because their owners or beneficiaries are applicable persons, the rate increases on withholding tax would not apply unless the discriminatory foreign country (and its applicable date) appears in the guidance for 90 days or more. Second, no penalties or interest will be imposed for failing to deduct or withhold the additional amount before January 1, 2027, if the person required to deduct or withhold were to demonstrate to the Secretary's satisfaction of that the person made best efforts to comply with the new requirements in a timely manner.

For a discriminatory foreign country, the applicable date would be the first day of the first calendar year beginning on or after the latest of (i) 90 days after the date of enactment of new IRC Section 899, (ii) 180 days after the date of enactment of the unfair foreign tax that causes the country to be treated as a discriminatory foreign country, or (iii) the first date that the country's unfair foreign tax begins to apply. The applicable number of percentage points in effect for the discriminatory foreign country for the period before the applicable date would be treated as zero.

Regulatory authority

The Bill directs the Secretary to issue regulations and other guidance to carry out the purposes of the provisions as necessary or appropriate. Specifically, the Secretary is directed to issue regulations and other guidance that would:

• Prevent the avoidance of the purpose of new IRC Section 899, including with respect to the application to branches, partnerships, and other entities
• List discriminatory foreign countries (and applicability dates) on a quarterly basis
• Notify Congress of any changes to the list of discriminatory foreign countries
• Exercise the authority to provide exceptions to the definitions of "applicable person," "extraterritorial tax," and "discriminatory tax"
• Prevent certain payments that are made to a foreign related party and treated as base erosion payments and base erosion tax benefits from being double counted in the denominator of the base erosion percentage for BEAT purposes

Implications

If enacted, the Bill would have a broad and significant impact given the definition of "applicable person" includes foreign governments, individuals (other than a citizen or resident of the United States), and various foreign entities.

In addition, a Majority-Foreign-Owned Non-Public Corporation held by an applicable person would be treated as an applicable person. Therefore, such corporation, if held by an applicable person, would fall within the Bill's scope even though the corporation may not be a tax resident of a discriminatory foreign country.

Similarly, the changes to the BEAT rules would place certain taxpayers that previously fell outside of BEAT within its scope. For example, those Majority-Foreign-Owned Non-Public Corporations could also be subject to higher top-up tax under BEAT (even if they are out of scope for BEAT under current law). Under the Bill, these taxpayers would not only be subject the higher BEAT rate of 12.5% but might also have an increase in BEMTA due to the elimination of certain exceptions to base erosion payments and the treatment of certain capitalized amounts as deductions for purposes of BEAT.

Even though the Bill includes some favorable safe harbors for withholding agents, those agents would still be required to implement new systems to comply with the new requirements. Without further guidance, the agents would also need to determine whether they made sufficient efforts to qualify for the safe harbor that would temporarily suspend any penalties or interest for failures to comply with the new requirements before January 1, 2027. Moreover, the inclusion of certain foreign governments in the definition of "applicable persons" could require withholding agents to build entirely new systems that could deduct or withhold different amounts for foreign governments that are applicable persons.

Unlike the Smith Bill, the Bill would be partially "self-executing" for certain foreign taxes. Specifically, foreign countries with a UTPR, DST, or DPT would be treated as having unfair foreign taxes. As a result, the modifications to BEAT and rate increases for taxes other than withholding taxes could apply to applicable persons even without any guidance from the Secretary.

Because the Bill includes a safe harbor for withholding taxes, the increase in withholding rates would not apply until the discriminatory foreign country with respect to which a person is an applicable person is listed in the guidance issued by the Secretary. For certain foreign corporations or trusts that are applicable persons because of their owners, rate increases on withholding taxes would not apply unless the discriminatory foreign country (and its applicable date) has been listed in the guidance for 90 days or more.

If enacted, Section 899 would provide enormous pressure on foreign countries to repeal or exempt US headquartered groups from any unfair foreign tax. After that repeal or exemption, the provision would discourage foreign countries from enacting any new unfair foreign tax (or removing any US exemption).