Senate Bill Delays "Unfair Foreign Taxes" Measure and Makes Key Changes

Overview and Background

On June 16, 2025, the Senate Finance Committee released its version of the “One Big Beautiful Bill Act” (the “Senate Bill”), a different version of which previously passed in the House of Representatives on May 22, 2025 (the “House Bill,” discussed in our prior alert found here).

Like the House Bill, the Senate Bill includes proposed Section 899 of the Internal Revenue Code, which would increase U.S. withholding and other tax rates for “applicable persons” of countries that impose certain “unfair foreign taxes” on U.S. individuals and business entities in such jurisdictions. An “unfair foreign tax” on U.S. individuals and business entities includes both an “extraterritorial tax” (such as an undertaxed profits rule (UTPR)) and a “discriminatory tax” (such as a digital services tax (DST)). Similarly, the version of Section 899 included in the Senate Bill would also expand the scope and applicable rate of the Base Erosion and Anti-Abuse Tax (“BEAT”). 

While the Senate Bill retains the general framework of Section 899 as included in the House Bill, it modifies the House version of Section 899 in several respects, including delaying the implementation of the provision and reducing the cap on the increased tax rates. The Senate version of Section 899 includes helpful clarifications of a few points that were unclear after the release of the House version; however, like the House version, important questions about the scope and applicability of Section 899 remain unanswered. 

Notable Changes from the House Version of Section 899

Timing

Under the Senate version, the implementation of proposed Section 899 would be delayed by one year, making January 1, 2027, the earliest date it could apply to calendar year taxpayers. The Senate version also maintains the House version’s temporary safe harbor for withholding, which protects withholding agents from liability for penalties and interest until January 1, 2027. It remains unclear if this safe harbor will be extended in a further revised draft of the Senate Bill noting that the implementation of Section 899 has been delayed until January 1, 2027, in any case. 

Limitation on Increased Tax Rates to Applicable Persons of Countries with Extraterritorial Taxes 

Under the House version, higher tax rates would apply to applicable persons of any country that imposes an “unfair foreign tax” on U.S. individuals and business entities in such jurisdiction, meaning both “extraterritorial taxes” and “discriminatory taxes.” By contrast, the Senate version imposes the increased tax rates solely to applicable persons of countries that levy extraterritorial taxes, notably a UTPR.¹

As discussed further below, the changes introduced to the BEAT regime in the Senate version would apply to applicable persons of all countries with any form of “unfair foreign tax.” As a result, applicable persons resident in jurisdictions that impose extraterritorial or discriminatory taxes (for example, a digital services tax (DST)) would still be subject to the “super BEAT” provisions but may not suffer the increased tax rates if their jurisdiction does not impose an extraterritorial tax.

Cap on Increased Tax Rates

Under the Senate version, tax rates would generally increase by 5% in the first applicable year, 10% in the next year, and 15% for any subsequent year. This means the increase is effectively capped at 15% above the otherwise applicable tax rate, including any lower rate available under a treaty.

In comparison, the House version would increase rates by 5% each year, up to a maximum increase of 20% over the statutory rate. The House approach calculates the cap based on the statutory rate (not taking into account the benefit of any reduced rate, such as a treaty rate), potentially meaning that U.S. source dividend and interest income exempt under a treaty could be subject to a maximum 50% rate (30% statutory rate plus maximum 20% increased rate under Section 899).

Interplay with Tax Treaties and Domestic Exemptions 

The House version left open questions about how the increased tax rates would interact with statutory and treaty-based exemptions and reduced rates. 

With respect to treaties, the Senate version addresses this issue by clarifying that Section 899 would apply to increase the tax imposed on items of income that are currently not subject to tax by reason of an exemption or exception, or to which tax is imposed at a 0% rate, which appears to include items exempt under a treaty (other than a treaty exemption from branch profits tax) (i.e., the Senate version would apply an incremental increase of 5-15% to the currently exempt income). 

With respect to domestic exemptions, the Senate version specifies several categories of income that are excluded from the increased Section 899 rates, including: (1) original issue discount already exempt under existing law; (2) portfolio interest; (3) deposit interest that is not effectively connected with a U.S. trade or business; (4) certain interest-related dividends paid by regulated investment companies; and (5) any other amounts that the Secretary of the Treasury may designate. 

While the targeted list of domestic exemptions included in the Senate version provides greater clarity on the types of income shielded from the scope of Section 899’s increased tax rates, it is unclear whether domestic exemptions absent from the list are overridden by Section 899. In particular, the exemption from FIRPTA for qualified foreign pension funds under Section 897(l) is not included in the list of domestic exemptions; as a result, it is currently uncertain whether Section 899 could apply to the FIRPTA gains derived by a qualified foreign pension fund. 

“Super BEAT”

Unlike the House version, which would have removed the minimum base erosion percentage threshold for taxpayers subject to the “super BEAT” (that is, US corporations majority-owned by “applicable persons”), the Senate draft introduces a 0.5% minimum base erosion percentage requirement (as compared with a new 2% minimum base erosion percentage requirement proposed under a different section of the Senate Bill).

Consistent with the House version, the Senate’s proposed super BEAT would override certain exceptions that normally apply under the regular BEAT regime. This includes the new exception in the Senate Bill for payments to high-tax related parties, which would not apply under super BEAT.

Coordination with Section 891

Section 891, enacted in 1934, authorizes the President to double certain U.S. tax rates on citizens and corporations of a foreign country that imposes discriminatory or extraterritorial taxes on U.S. citizens or corporations. The Senate version clarifies that: (i) the terms “discriminatory tax” and “extraterritorial tax” used in Section 891 are defined by Section 899; and (ii) Section 899 does not apply during any period in which an increased “specified rate of tax” is imposed under Section 891. 

Looking Ahead

The Senate Bill remains subject to change as it undergoes negotiations in that Chamber. 

Thereafter, because the Senate Bill differs from the House Bill, the House will either need to approve the Senate Bill or both Chambers will have to reconcile their different versions through negotiations before voting on a final bill. Several House GOP members have already expressed dissatisfaction with the current draft of the Senate Bill, making further changes likely given the narrow GOP margin in the House. 

¹  Note that unlike the House version, the Senate version does not specifically reference a diverted profits tax (DPT). Therefore, it is currently unclear how a DPT would be treated under the Senate version of proposed Section 899.