Section 899 Retaliatory Tax: How It Worked and Why It Was Dropped

The Section 899 retaliatory tax was a proposed addition to the Internal Revenue Code, sometimes called the “revenge tax,” that would have imposed escalating surcharges on foreign individuals, companies, and governments tied to countries whose tax laws the United States considered discriminatory against American businesses. It passed the U.S. House of Representatives as part of H.R. 1 in 2025 but was removed before the bill was signed into law on July 4, 2025, as P.L. 119-21.¹ It is not law. It still matters, because the threat of it helped produce a G7 and OECD agreement carving U.S.-parented multinationals out of Europe’s global minimum tax, and the framework Congress drafted remains available if lawmakers want to revive it.

How the Surcharge Would Have Worked

Section 899 did not create a new tax. It layered an escalating surcharge onto tax rates that already apply to foreign persons earning U.S. income. The surcharge would have started at 5 percentage points above the normal statutory rate and climbed by another 5 points each year until it reached a ceiling of 20 points above statutory.¹ For income that already benefits from a treaty-reduced rate, the surcharge would have stacked on top of the treaty rate until the combined rate hit 50%.

The higher rates would have flowed through familiar channels: withholding on passive U.S.-source income like dividends, interest, rents, and royalties; tax on income effectively connected to a U.S. trade or business; the branch profits tax on foreign companies operating through U.S. branches; and the excise tax on foreign private foundation investment income.¹

The logic was straightforward leverage. If a country taxed American companies in ways Washington considered discriminatory, its residents and businesses would pay more to the IRS on their U.S. earnings until the policy changed.

Which Foreign Taxes Would Have Triggered It

Three categories of foreign taxes were named as automatic triggers:

Undertaxed profits rule (UTPR) taxes under the OECD’s Pillar Two framework, which let one country collect extra tax on a multinational’s profits when a related entity elsewhere is taxed below 15%.
Digital services taxes aimed at revenue that large technology companies earn from digital advertising, data sales, and online marketplaces. The U.S. Trade Representative had previously found DSTs in several countries discriminated against American firms.
Diverted profits taxes targeting arrangements that shift profits away from the country where economic activity happens. The UK’s diverted profits tax, sometimes called the “Google tax,” is the best-known example.

Beyond those, the Treasury Secretary could have designated additional foreign taxes as unfair if they were extraterritorial, discriminatory, or designed to fall disproportionately on U.S. persons. Value-added taxes were explicitly excluded.

Which Countries and Which Taxpayers

Treasury would have published a list of “discriminatory foreign countries.” Based on jurisdictions that had already adopted UTPRs or DSTs, the likely targets included European Union members, the United Kingdom, Australia, and South Korea, with Japan scheduled to adopt a UTPR in 2026 and Canada considering one.¹ Those jurisdictions account for a substantial share of foreign investment into the United States.

The definition of “applicable person” reached well beyond the listed governments themselves. It covered:

Foreign governments of listed countries, including on payments currently exempt from U.S. tax.
Individuals who are tax residents of a listed country, excluding U.S. citizens and residents.
Corporations that are tax residents of a listed country, unless more than 50% of their vote or value is owned by U.S. persons.
Foreign private foundations created or organized in a listed country.
Foreign-owned entities where more than 50% of a corporation’s voting power or value is held by other applicable persons, unless the corporation is publicly traded.
Trusts, partnerships, and branches with majority beneficial interests held by applicable persons or identified by Treasury.

Attribution rules were built in to block workarounds through layered ownership. A French-owned holding company in the Netherlands with a U.S. subsidiary could still have triggered the surcharge if France appeared on the list. That reach into multi-tier group structures is what alarmed international tax planners the most.

The Treaty Problem

Tax treaties commonly reduce U.S. withholding on dividends, interest, and royalties, sometimes to zero. Section 899 would have added its surcharge on top of the treaty rate, effectively overriding the treaty benefit. A treaty rate of 15% could have climbed toward 35% at full phase-in; a treaty rate of zero could have moved to as much as 20%, subject to the 50% overall cap.¹

Congress can override treaties through later-enacted legislation under U.S. domestic law, so the approach was legally available. It would have strained diplomatic relationships and invited retaliation from treaty partners.

The “Super BEAT” for Foreign-Owned U.S. Companies

Section 899 also expanded the base erosion and anti-abuse tax (BEAT) for U.S. corporations owned by applicable persons. The BEAT is an existing minimum tax that limits how much a foreign-owned U.S. company can reduce its tax bill through deductible payments to foreign affiliates. Under the proposal, the BEAT rate would have risen to 12.5% for affected companies, the tax base would have widened, and certain credits would have been disallowed.¹ This piece reached U.S.-incorporated companies, not just foreign persons, by targeting subsidiaries of foreign parents on the list.

Why It Was Dropped From the Final Bill

The House passed H.R. 1 with Section 899 in it, but the provision did not survive into P.L. 119-21, signed on July 4, 2025.¹

Two things converged. The threat of escalating surcharges on trillions of dollars in cross-border income pushed the G7, and then the broader OECD and G20 membership, to negotiate a carve-out exempting U.S.-parented multinationals from the UTPR. Once that concession was in hand, the political rationale for actually enacting the retaliatory tax weakened.

The financial sector also pushed back on compliance grounds. Withholding agents would have had to build systems that tracked which countries were on Treasury’s list, traced ownership chains to identify applicable persons, and applied different surcharge rates depending on how long a country had been designated. The proposal included a temporary safe harbor for withholding agents, but industry viewed even that as too short a runway.

Why the Proposal Still Matters

Section 899 is not law, but treating it as a dead letter would be a mistake. Congress showed it is willing to point the U.S. tax code at foreign regimes it views as discriminatory, and the bipartisan frustration with DSTs and Pillar Two that produced the bill has not gone away.

A few practical points follow. Similar legislation could return if the OECD carve-out unravels or if more countries adopt taxes Washington considers discriminatory. The detailed framework Congress drafted, including the applicable-person definitions, the escalating rate structure, and the BEAT modifications, gives lawmakers a template that could be enacted quickly. Japan’s scheduled 2026 UTPR and other pending measures could reopen the debate.

For U.S. companies with foreign parents, the Super BEAT concept deserves separate attention. An expanded BEAT aimed at foreign-owned U.S. subsidiaries has broad support in Congress and could appear in future tax legislation on its own, without the retaliatory wrapper around it. Restructuring ownership or intercompany payment flows takes time, and waiting for enactment leaves little room to move.

1
Congress.gov. Enforcement of Remedies Against Unfair Foreign Taxes