The US has declared a tax war, and it’s targeting its allies.
Congress is preparing to weaponise the US tax code against foreign tax regimes it deems unfair. The newly proposed section 899 of the Internal Revenue Code would allow the US to impose sharp tax penalties on inbound investors and corporations connected to countries that impose ‘unfair foreign taxes’ on US-headquartered multinationals.
Undertaxed Profits Rules (UTPRs) under OECD Pillar Two.
How it works: If a foreign country imposes any of these taxes, it may be designated a ‘discriminatory foreign country’. Individuals, corporations, trusts, partnerships, and even governments connected to that country become ‘applicable persons,’ and face:
increased US withholding taxes; by up to 20 percentage points over the statutory rate, not the reduced treaty rate;
overrides of treaty-reduced rates; and
automatic inclusion in the BEAT regime, with enhanced penalties and expanded scope.
Why BEAT is no longer just a large-cap concern: Under current law, the Base Erosion and Anti-Abuse Tax (BEAT) only applies to US corporations that have $500m+ in average gross receipts and a 3%+ base erosion percentage.
Section 899 removes these thresholds for US non-public corporations that are majority-owned by applicable persons. Once tied to a discriminatory country, even small inbound subsidiaries could face BEAT, and as a consequence:
the BEAT rate increases to 12.5%;
all income tax credits reduce the tax shield;
capitalised payments to foreign affiliates are treated as deductible; and
exclusions for withholding-taxed and cost-based services are eliminated
The countries at risk of designation: Based on current tax laws, the following countries appear to meet section 899’s definition of a ‘discriminatory foreign country’:
France: DST enacted;
UK: DST and DPT;
Austria: DST enacted;
Italy: DST enacted;
Spain: DST enacted;
Australia: DPT enacted; Pillar Two adopter;
Canada: DST legislation passed; may enforce retroactively to 2022;
Poland: DST adopted;
Turkey: DST adopted; and
India: equalisation levy (DST-equivalent).
These countries have already enacted, or are imminently implementing, measures likely to trigger classification once section 899 becomes law. Treasury guidance will formalise the list, but for DST, DPT, and UTPR jurisdictions, the Bill is self-executing.
The implications for inbound structures: Foreign-controlled US subsidiaries, even those without a tax presence in the discriminatory country, will face:
higher US tax exposure;
more aggressive BEAT calculations; and
the loss of treaty-based planning opportunities.
These rules apply to private equity funds, sovereign wealth vehicles, family offices, pension-backed entities, and foundations; any structure with ownership links to a listed country.
Final thoughts: The bottom line is that this is a policy of tax retaliation. Section 899 marks a shift from cooperation to conditional confrontation. The US is no longer waiting for international consensus. Instead, it is tying inbound tax costs to the global tax behaviour of foreign governments.
As DSTs, DPTs and UTPRs continue spreading, so will the reach of section 899. Investors and multinational groups should begin mapping exposure now, because once enacted, this rule won’t just affect policy. It will directly hit the bottom line.
The US has declared a tax war, and it’s targeting its allies.
Congress is preparing to weaponise the US tax code against foreign tax regimes it deems unfair. The newly proposed section 899 of the Internal Revenue Code would allow the US to impose sharp tax penalties on inbound investors and corporations connected to countries that impose ‘unfair foreign taxes’ on US-headquartered multinationals.
Undertaxed Profits Rules (UTPRs) under OECD Pillar Two.
How it works: If a foreign country imposes any of these taxes, it may be designated a ‘discriminatory foreign country’. Individuals, corporations, trusts, partnerships, and even governments connected to that country become ‘applicable persons,’ and face:
increased US withholding taxes; by up to 20 percentage points over the statutory rate, not the reduced treaty rate;
overrides of treaty-reduced rates; and
automatic inclusion in the BEAT regime, with enhanced penalties and expanded scope.
Why BEAT is no longer just a large-cap concern: Under current law, the Base Erosion and Anti-Abuse Tax (BEAT) only applies to US corporations that have $500m+ in average gross receipts and a 3%+ base erosion percentage.
Section 899 removes these thresholds for US non-public corporations that are majority-owned by applicable persons. Once tied to a discriminatory country, even small inbound subsidiaries could face BEAT, and as a consequence:
the BEAT rate increases to 12.5%;
all income tax credits reduce the tax shield;
capitalised payments to foreign affiliates are treated as deductible; and
exclusions for withholding-taxed and cost-based services are eliminated
The countries at risk of designation: Based on current tax laws, the following countries appear to meet section 899’s definition of a ‘discriminatory foreign country’:
France: DST enacted;
UK: DST and DPT;
Austria: DST enacted;
Italy: DST enacted;
Spain: DST enacted;
Australia: DPT enacted; Pillar Two adopter;
Canada: DST legislation passed; may enforce retroactively to 2022;
Poland: DST adopted;
Turkey: DST adopted; and
India: equalisation levy (DST-equivalent).
These countries have already enacted, or are imminently implementing, measures likely to trigger classification once section 899 becomes law. Treasury guidance will formalise the list, but for DST, DPT, and UTPR jurisdictions, the Bill is self-executing.
The implications for inbound structures: Foreign-controlled US subsidiaries, even those without a tax presence in the discriminatory country, will face:
higher US tax exposure;
more aggressive BEAT calculations; and
the loss of treaty-based planning opportunities.
These rules apply to private equity funds, sovereign wealth vehicles, family offices, pension-backed entities, and foundations; any structure with ownership links to a listed country.
Final thoughts: The bottom line is that this is a policy of tax retaliation. Section 899 marks a shift from cooperation to conditional confrontation. The US is no longer waiting for international consensus. Instead, it is tying inbound tax costs to the global tax behaviour of foreign governments.
As DSTs, DPTs and UTPRs continue spreading, so will the reach of section 899. Investors and multinational groups should begin mapping exposure now, because once enacted, this rule won’t just affect policy. It will directly hit the bottom line.
