News | One Big Beautiful Bill Act (OBBBA)

Summary

Proposed section 899 of the U.S. OBBBA introduces a phased and potentially significant increase in U.S. tax rates on business and investment income earned by non-U.S. persons residing in "discriminatory countries". Investors could see a meaningful reduction in returns on U.S. investments, especially those driven by dividends and potentially interest, while capital gains-focused strategies may remain unaffected. Section 899 appears to function as a political countermeasure against foreign tax regimes targeting U.S. persons, such as digital services taxes and the OECD’s Undertaxed Profits Rule (UTPR) from the Pillar Two Framework. As a result, a broad range of countries, including most EU member states and the United Kingdom, could be designated as discriminatory, subjecting their residents to higher U.S. tax rates on income from the United States. Qualified Intermediaries, in their role as withholding agents, may be required to monitor which countries are designated as “discriminatory” and apply the corresponding increased withholding tax rates to customers resident in those countries. Many QIs would have to adjust its systems setup to cater for these tax rates.

Although still in draft form, having passed the House and under Senate review, section 899 reflects similar goals as existing section 891,[1] though section 899 takes a more measured approach compared to the harsh section 891.Ultimately, the impact of these rules will depend on the extent to which they are primarily used as a political countermeasure or also actively enforced, and if enforced, which countries are designated as discriminatory.

[1] This IRC section was already in force in 1954. It grants the president authority to steeply increase U.S. tax rates, at a much faster rate and with a much higher cap than under section 899.

Phased increase in tax rates

Section 899 enables a phased increase in U.S. tax rates on income earned by non-U.S. persons from U.S. sources, to the extent such persons are residents of “discriminatory countries”. Section 899 applies to:

• U.S. withholding taxes: such as the 30% statutory tax rate on Fixed Determinable Annual or Periodical (FDAP) income. Where a lower treaty rate applies, the gradual increase under section 899 is expected to apply to that reduced rate. It is generally expected that U.S. domestic exemptions, such as the Portfolio Interest Exemption (PIE), would continue to shield portfolio interest from section 899, while treaty exemptions will not prevent section 899.

• U.S. income taxes: such as the tax rates applicable to income that is effectively connected to a U.S. trade or business (or permanent establishment), gains or losses subject to FIRPTA (which are treated as deemed ECI) and income subject to the Branch Profits Tax.

The increased tax rates under Section 899 are applied on a calendar-year basis. For withholding tax purposes, the applicable rate is determined as of the date of payment (or disposition, such as under section 1446(f)).

The rate increase is structured as:

• A 5% increase applies in the first calendar year a country is designated as a “discriminatory country”;

• An additional 5% is added for each subsequent year the country remains on the list, up to a maximum total increase of 20% over the statutory rate (e.g., a 30% statutory rate may increase to a maximum of 50%).

If a taxpayer is tax resident in multiple non-U.S. jurisdictions, the highest applicable tax rate should be applied.

Discriminatory countries

Countries classified as “discriminatory” will be included on a publicly available list, which is to be updated on a quarterly basis. Withholding agents, including Qualified Intermediaries (QIs), are expected to rely on this list to determine the appropriate application of Section 899. Note:

• A safe harbor rule is to apply for jurisdictions that are not (yet) on the list.

• A best-efforts standard is to apply to withholding agents, including QIs, for any failure to apply the increased tax rates prior to 1 January 2027, provided they can demonstrate that they acted in good faith and made best efforts to comply.

A country may be included on the list as “discriminatory” when it for example imposes a tax:

1. That deviates from generally applicable taxes, such as income tax, value-added tax (VAT), real property tax, or standard withholding taxes on gross income, or if it applies a tax to income that would not be considered sourced to that country under U.S. sourcing rules; and

2. That applies to U.S. persons or non-U.S. legal entities that are majority-owned by U.S. persons, as per the Controlled Foreign Corporation (CFC) rules.

It is our understanding that tax regimes under section 899 the following types of tax regimes may be categorized as discriminatory:

- The Undertaxed Profits Rule (UTPR) (from the OECD Pillar Two framework);

- Digital services taxes; and

- Diverted profits taxes.

Based on this understanding, the United States may classify amongst others the following jurisdictions as discriminatory:[2]

- Most (potentially all) EU member states

- United Kingdom

- Australia

- Canada

- South Korea

[2] Refer to The Economist article: “America has found a new lever to squeeze foreigners for cash”, published 29 May 2025.

Disclaimer: This summary is for informational purposes only and does not constitute tax advice. It is based on the draft version of section 899 and is subject to change. The contents should be re-evaluated once the final version of section 899 becomes available.