Section 899: The U.S. Just Declared a Tax War And It’s Targeting Allies

Congress is preparing to weaponize the U.S. tax code against foreign tax regimes it deems unfair. The newly proposed Section 899 of the Internal Revenue Code would allow the U.S. to impose sharp tax penalties on inbound investors and corporations connected to countries that impose “unfair foreign taxes” on U.S.-headquartered multinationals.

Specifically, Section 899 targets jurisdictions with:

• Digital Services Taxes (DSTs)
• Diverted Profits Taxes (DPTs)
• 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 U.S. withholding taxes; by up to 20 percentage points over the statutory rate, not the reduced treaty rate
• Overrides of treaty-reduced rates
• Automatic inclusion in the BEAT regime, with enhanced penalties and expanded scope

BEAT: No Longer Just a Large-Cap Concern

Under current law, the Base Erosion and Anti-Abuse Tax (BEAT) only applies to U.S. corporations that:

• Have $500 million+ in average gross receipts, and
• Have a 3%+ base erosion percentage

Section 899 removes these thresholds for U.S. non-public corporations that are majority-owned by applicable persons. Once tied to a discriminatory country, even small inbound subsidiaries could face BEAT.

• The BEAT rate increases to 12.5%
• All income tax credits reduce the tax shield
• Capitalized payments to foreign affiliates are treated as deductible
• Exclusions for withholding-taxed and cost-based services are eliminated

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

United Kingdom 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

India Equalization 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 formalize the list, but for DST, DPT, and UTPR jurisdictions, the bill is self-executing.

Implications for Inbound Structures

Foreign-controlled U.S. subsidiaries, even those without a tax presence in the discriminatory country, will face:

• Higher U.S. tax exposure
• More aggressive BEAT calculations
• 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.

Bottom Line: A Policy of Tax Retaliation

Section 899 marks a shift from cooperation to conditional confrontation. The United States is no longer waiting for international consensus. Instead, it is tying inbound tax costs to the global tax behavior 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.

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