As the U.S. Senate is set to consider President Trump's domestic policy bill, non-U.S.-based multinational businesses and non-U.S. investors are preparing for wholesale changes to the U.S. international tax landscape, including for U.S. inbound and outbound tax planning.
New Section 899 Will Impact Non-U.S. Investment and Business in the U.S.
The "One Big Beautiful Bill Act" (the "Bill"), passed by the U.S. House of Representatives last month, introduces new Section 899 as a punitive response to extraterritorial and discriminatory taxes that certain non-U.S. countries have enacted (or plan to enact) for the purpose of capturing revenue from multinational groups and/or implementing global minimum tax policies. These extraterritorial taxes include digital services taxes, undertaxed profits rules, diverted profits taxes (for example as enacted by the UK and Australia), and other taxes that are considered by the Trump administration to disproportionately affect U.S. businesses.
Section 899 retaliates against these non-U.S. tax regimes by imposing escalating U.S. federal tax rate increases on non-U.S. individuals and entities (including government entities) from countries that have implemented "unfair foreign taxes." Under Section 899, any applicable non-U.S. taxpayers who are subject to U.S. federal income tax or withholding will face tax rate increases of five percentage points for the first year following enactment and five percentage points in each subsequent year (capped at a total increase of 20 percentage points).
Section 899 also expands the scope and tax rate for the existing base erosion and anti-abuse tax (BEAT), which is essentially a U.S. minimum tax designed to prevent shifting of profits out of the United States. Under Section 899, the BEAT regime would be extended to any domestic or non-U.S. corporation that is over 50% owned by non-U.S. individuals and/or entities. These non-U.S.-controlled corporations will be subject to a 12.5% BEAT rate (which is higher than the standard BEAT rate set forth under the Bill; see further discussion below). As a result, certain multinational taxpayers would likely become subject to the BEAT regime despite not meeting the relevant thresholds under the existing BEAT rules.
Other Key International Tax Provisions
The Bill also includes rate adjustments and permanent extensions of certain international tax provisions introduced under the Tax Cuts and Jobs Act (TCJA). These changes will impact U.S. taxpayers with non-U.S. income, particularly multinational corporations, and investors with cross-border interests.
Key changes include:
- A permanent global intangible low-taxed income (GILTI) inclusion rate of 49.2%, resulting in an effective tax rate of 10.688% (before foreign tax credits). By comparison, the current GILTI effective tax rate is 10.5%, and it is scheduled to increase to 13.125% in 2026 under the TCJA
- A reduction in the foreign-derived intangible income (FDII) deduction from 37.5% to 36.5%, resulting in an effective tax rate of 13.335%. By comparison, the current FDII effective tax rate is 13.125%, and it is scheduled to increase to 16.406% in 2026 under the TCJA
- An adjustment of the BEAT rate to 10.1%. By comparison, the current BEAT rate is 10%, and it is scheduled to increase to 12.5% in 2026 under the TCJA
- The elimination of Section 954(c)(6), which may result in added income inclusions for U.S. shareholders with respect to certain payments (e.g., dividends, interest) made between related controlled foreign corporations (CFCs)
The modest rate changes set forth in the Bill would supersede the larger rate increases that are otherwise scheduled for 2026 under the TCJA. For certain U.S. multinational groups and shareholders, the elimination of Section 954(c)(6) could materially impact effective tax rates with respect to offshore operations and cash repatriation.
U.S. Domestic Business Tax Changes That Favorably Affect International Operations
Several enhanced domestic deductions could indirectly lower CFC income inclusions for U.S. shareholders, including:
- Section 163(j), which reinstates the addback of depreciation and amortization for the purpose of computing the interest deductibility limitation, thereby increasing allowable business interest deductions through December 31, 2029
- Section 168(k), set to be effective through December 31, 2029, which allows businesses to immediately deduct the full cost of qualifying equipment and other assets, rather than spreading the deduction over several years
- Section 174, which permits immediate deduction of qualified research and experimental expenditures for domestic development activities through December 31, 2029 (however, research and experimental expenses for offshore development activities must continue to be amortized over 15 years)
Through careful planning, these favorable changes may provide U.S. taxpayers with opportunities to reduce their overall effective tax rates with respect to international operations.
What's Next?
As of the date of this alert, the Bill is awaiting Senate action, and significant modifications are expected. Based on the broad scope of Section 899 and the complex interdependencies of various international and domestic tax provisions, the Bill is expected to have a material impact on multinational taxpayers.
If you or your company have questions as the domestic policy Bill moves through Congress, contact the authors. Venable's international tax team can help clients assess their global tax profiles and identify strategic tax planning opportunities in light of the changing U.S. international tax landscape.