The US Senate Finance Committee has released a substitute (the "Senate version") for the tax provisions of the "One Big Beautiful Bill," the budget reconciliation bill currently under consideration by Congress. An earlier version of this bill was passed by the US House of Representatives on May 22, 2025 (the "House version"). Our prior Legal Update, US House Passes Bill Targeting 'Unfair Foreign Taxes, provided a summary and analysis of the House version of the retaliatory tax measures introduced by Proposed Section 899. Here, we highlight the important changes in the Senate version of Proposed Section 899.1
The Senate hopes to consider this legislation within the next two weeks. However, because the Senate has made changes to the House version, the House will either need to vote to approve the Senate version or the two Chambers will need to negotiate over the changes and then vote on any final compromise bill.
Timing
The Senate version of Proposed Section 899 delays implementation by one year, which means the earliest it can go into effect for calendar year taxpayers is January 1, 2027. The temporary safe harbor for withholding retains the House version's protection from penalties and interest until January 1, 2027. It is not clear whether the Senate intended this simultaneous implementation, or if it was unintentional and will be revised to extend the withholding safe harbor by an additional year until 2028.
Definition of Unfair Foreign Taxes
The Senate version redefines "unfair foreign tax" to mean an extraterritorial tax or a discriminatory tax with important changes to the application of increased tax rates, as described below.
The definition for "extraterritorial tax" includes any tax imposed under an Undertaxed Profits Rule (UTPR). The definition for "discriminatory tax" includes any digital services tax (DST). The catch-all that provides the Secretary the discretion to add to the list of unfair foreign taxes is now built into the definition of discriminatory tax.
Increased Tax Rates Limited to Countries with Extraterritorial Taxes
While the increased tax rates under the House version would apply in respect of all countries that have "unfair foreign taxes" (defined as "extraterritorial taxes" or "discriminatory taxes"), in the Senate version the increased tax rates would only apply to countries that impose extraterritorial taxes (notably, a UTPR).
The modifications to the Base Erosion and Anti-Abuse Tax (BEAT), however, apply with respect to all countries that have any unfair foreign tax. Thus, "applicable persons" resident in countries that impose discriminatory taxes (notably, a DST) but do not impose an extraterritorial tax will be subject to the so-called "super BEAT" modifications but not to the increased tax rates.
Under the Senate version, applicable tax rates can only be increased in annual 5% increments to a maximum of 15%. In the case of a taxpayer entitled to a reduced rate or tax exemption under a treaty, this maximum increase is calculated by reference to the treaty rate. The House version contemplated in all cases a maximum increase of 20% above the applicable statutory rate (e.g., FDAP withholding could increase up to a 50% rate for taxpayers that qualify for a treaty).
Tax Treaties
The Senate version clarifies that Proposed Section 899 would also apply to increase taxation of items of income that benefit from an exemption, exception or zero rate of tax under a tax treaty (except to the extent a treaty provides an exemption from branch profits tax).
Modified BEAT ("super BEAT")
While the House version would have eliminated the minimum base erosion percentage threshold for taxpayers subject to the super BEAT (i.e., US corporations that are majority-owned by "applicable persons"), the Senate version provides for a minimum 0.5% base erosion percentage threshold.2
As in the House version, the Senate version of the super BEAT turns off certain exceptions otherwise applicable under the regular BEAT, including the new exception that the Senate version introduces for payments to high-tax related parties.
Domestic Law Exemptions
The Senate version clarifies that the following statutory exemptions still apply, and are not subject to increased taxation under Proposed Section 899:
- original issue discount excluded under Sections 871(a)(1) or 881(a)(1),
- portfolio interest excluded under Sections 871(h) and 881(c),
- certain interest and interest-related dividends like deposit interest, income derived by a foreign central bank from bankers' acceptances, and regulated investment company interest-related dividends, and
- any similar amounts specified by the Secretary.
The exemption from FIRPTA for qualified foreign pension funds (QFPF) under Section 897(l) is absent from the list of exceptions included in the proposed statutory text, and it is unclear whether this means that Section 899 could apply to a QFPF's FIRPTA gains. Similarly, the application of a tax exemption under Section 501(c) is not listed, so it is unclear whether foreign tax-exempt entities would be subject to Proposed Section 899.
Other Considerations
The Senate version provides slightly more detail regarding the Secretary's list of countries with "unfair foreign taxes," which it calls "offending foreign countries." The list will include a country's applicable date and information as to which of such countries has only "unfair foreign taxes" which are "extraterritorial taxes." It is not clear why the Secretary's list would be limited to those countries that only have "unfair foreign taxes" which are "extraterritorial taxes." It appears that this list would not identify countries that impose both "extraterritorial taxes" and "discriminatory taxes." As a result, a withholding agent will not be able to determine, based on a review of the list, whether a country imposes only a "discriminatory tax" or both an "extraterritorial tax" and "discriminatory tax," in which case it will be difficult to comply with the increased withholding tax requirements.
Footnotes
1 In addition to the changes made to Proposed Section 899, the Senate version would also make several changes to international tax provisions of the Internal Revenue Code that were not included in the House version.
2 The Senate version would modify the BEAT rules to lower the generally applicable base erosion percentage threshold from 3% to 2%.
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