On June 16, 2025, the Senate Finance Committee released its own version (Senate Version) of the tax provisions of H.R. 1, entitled the “One Big Beautiful Bill Act,” which the U.S. House of Representatives passed on May 22, 2025.
The Senate Version introduces several important changes and clarifications to the proposed new Section 899 of the Internal Revenue Code (Code), “Enforcement of Remedies Against Unfair Foreign Taxes” that was included in the bill that was passed by the House (commonly referred to as the Revenge Tax). If enacted as proposed in the Senate Version, Section 899 would increase by up to 15 percentage points a range of U.S. federal tax rates, including both U.S. withholding tax rates (such as those on interest, dividends, and other fixed or determinable annual or periodical income paid to foreign persons) and certain other U.S. income tax rates (such as the regular tax rates applicable to nonresident individuals and foreign corporations, branch profits tax, and tax on private foundations), on income derived by taxpayers who are resident in, or otherwise connected to, jurisdictions the U.S. government designates as “offending foreign countries.”
The Senate Version includes a specific exception from the tax increase under Section 899 for “portfolio interest,” as well as a cap of 15% on the additional tax under Section 899 (as opposed to 20% cap the House proposed, determined without regard to any rate applicable in lieu of the statutory rate). The Senate Version also delays the implementation of the proposed Section 899, generally until Jan. 1, 2027 (compared to the effective date of Jan. 1, 2026, under the House version).
This GT Alert summarizes the most significant substantive changes and explains their potential impact.
1. Explicit Exemption for Portfolio Interest and Similar Income
What’s New
The Senate Version expressly excludes portfolio interest and certain other interest income from the punitive tax rate increases imposed on persons connected to offending foreign countries. Specifically, the increased rates under Section 899 do not apply to:
- Portfolio interest excluded from U.S. withholding tax under sections 871(h) and 881(c) of the Code;
- Original issue discount excluded from U.S. withholding tax under sections 871(a)(1) or 881(a)(1) of the Code;
- S. source bank deposit interest, certain interest-related dividends received from U.S. entities qualifying as regulated investment companies (RICs), and certain other types of U.S.-source interest and dividend income excluded from U.S. withholding tax under sections 871(i), 871(k), 881(d), or 881(e) of the Code; and
- Any similar amounts the Secretary specifies.
- Stepwise Rate Increases:
- Use of Weighted Average:
- Multiple Offending Countries:
- Cap on Rate Increases:
- Preventing avoidance of Section 899’s purposes;
- Adjusting application to branches, partnerships, and other entities;
- Preventing double counting for Base Erosion and Anti-Abuse Tax (BEAT) purposes; and
- Requiring quarterly updates to the list of offending countries and notification to Congress.
- Broader Application of BEAT:
- Increased BEAT Rate:
- Calculation Adjustments:
Impact
This change preserves the longstanding portfolio interest exemption and similar exclusions, ensuring that these types of income remain shielded from the new penalty rates, even for residents of countries subject to Section 899. Notably, the House version did not provide this explicit protection. Instead, the House Committee Report stated that Section 899 is not intended to apply to income that is expressly “excluded” from the scope of the specified tax, which notably includes the portfolio interest exemption as an example of such an excluded category.
It remains uncertain whether other types of U.S.-source income that are not expressly excluded in the Senate Version, beyond those specifically listed, would also be protected from Section 899’s increased rates. This ambiguity arises because, while the Senate text provides clear exclusions for certain categories, it does not address all possible forms of exempt income. This uncertainty arises from the House Committee’s distinction between income that is expressly excluded from tax and income that is subject to a reduced or zero rate under an applicable treaty or other provision. As a result, the treatment of other excluded income may depend on future regulatory guidance or further legislative clarification.
2. Safe Harbor and Delayed Implementation for Withholding Agents
What’s New
The Senate Version provides a clear and extended safe harbor for withholding agents. No penalties or interest would be imposed for failures to deduct or withhold under the new rules before Jan. 1, 2027, if the withholding agent demonstrates best efforts to comply in a timely manner.
Additionally, the Senate Version introduces a 90-day grace period for newly listed offending countries, during which withholding agents are not required to apply the increased rates.
Impact
This change would give financial institutions and other withholding agents more time and flexibility to adapt to the new requirements, potentially reducing the risk of inadvertent noncompliance as countries are added to the offending list.
3. Detailed Calculation of Increased Tax Rates
What’s New
The Senate version introduces detailed mechanics for calculating the increased tax rates, including:
The increased rate is determined by adding a specified number of percentage points (applicable number of percentage points) to the statutory U.S. tax rate that would otherwise apply. The applicable number of percentage points increases over time for each offending foreign country:
– 5 percentage points during the first one-year period beginning on the “applicable date” for that country,
– 10 percentage points during the second one-year period,
– 15 percentage points for any subsequent period.
If the applicable number of percentage points changes during a taxpayer’s taxable year (for example, if the one-year period rolls over mid-year), the increased rate would be computed using a weighted average based on (i) the number of days each rate was in effect during the taxable year, and (ii) the corresponding applicable number of percentage points for each period.
If a taxpayer is an “applicable person” with respect to more than one offending foreign country during the taxable year, the highest applicable number of percentage points in effect for any of those countries applies for the entire year.
Under the Senate draft of Section 899, the maximum increase to withholding tax rates for persons connected to an offending foreign country is capped at 15 percentage points above the otherwise applicable rate, including any reduced rate under an income tax treaty. This means that, regardless of the number of years a country remains on the offending list, the penalty rate cannot exceed 15% above the rate that would otherwise apply to the payment, whether that is the statutory rate or a treaty-reduced rate.
In contrast, the House version allows for a higher cap: the increased rate may be up to 20 percentage points above the U.S. statutory rate, regardless of any treaty reduction. Thus, the House bill might result in a much higher effective withholding rate, especially where a treaty would otherwise provide for a lower rate.
Both versions retain the mechanism of increasing the rate by an additional five percentage points for each year a country remains on the list (5% in year one, 10% in year two, and 15% in year three and beyond). However, the Senate draft’s lower cap and its application to the treaty rate, rather than the statutory rate, represent a significant narrowing of the potential penalty.
Impact
These clarifications may provide greater certainty in the application of the new penalty rates, especially for taxpayers with complex international connections.
4. Expanded Regulatory and Administrative Authority
What’s New
The Senate Version grants the Treasury secretary broader authority to issue regulations and guidance, including:
Impact
This expansion seeks to give the Treasury greater flexibility to implement and enforce Section 899, respond to emerging avoidance techniques, and ensure coordinated interaction with other international tax provisions such as BEAT. It also introduces more frequent oversight and transparency through regular country list updates and Congressional reporting.
5. Section 891 Coordination
What’s New
The Senate Version explicitly coordinates Section 899 with Section 891, providing that Section 899 does not apply during any period when Section 891 rate increases are in effect. Section 891 of the Code authorizes the president to double certain U.S. tax rates on citizens and corporations of foreign countries that subject U.S. citizens or corporations to discriminatory or extraterritorial taxes. It is a retaliatory provision intended to address unfair foreign tax practices.
Impact
This aims to prevent overlapping penalty regimes and provide clarity on which provisions control in the event of concurrent applicability.
6. Changes to BEAT Provisions
What’s New
BEAT is a U.S. federal income tax regime added to the Code by the Tax Cuts and Jobs Act of 2017 (TCJA). Under the existing BEAT rules, a U.S. taxpayer may be liable for an additional tax, calculated as the excess of 10% of modified taxable income (12.5% for taxable years beginning after Dec. 31, 2025) over the taxpayer’s regular tax liability (reduced by certain credits), if certain payments such taxpayer makes to related foreign parties (base erosion payments) and specified thresholds and conditions are met.
The Senate Version largely follows the House version’s approach of significantly expanding BEAT’s applicability and imposing stricter BEAT rules for U.S. corporations (other than publicly held corporations) that are majority-owned (more than 50%) by persons resident in “discriminatory foreign countries” (Applicable U.S. Corporations). Under the Senate Version, such stricter BEAT rules would also apply to U.S. branches of foreign corporations resident in “discriminatory foreign countries” (Applicable U.S. Branches). The Senate Version also includes some clarifications and technical adjustments that were not included in the House version:
Under existing law, the BEAT generally only applies to entities with gross receipts of more than $500 million and whose total deductions that are related to payments made to foreign related parties (base erosion payments) exceed a certain threshold. Both the House version and the Senate Version would apply the BEAT rules to any Applicable U.S. Corporation and Applicable U.S. Branch without regard to the $500 million gross receipts test and apply a reduced base erosion percentage threshold of 0.5% instead of 2%. If enacted as proposed in the Senate Version, this would mean that the BEAT rules would apply to almost all Applicable U.S. Corporations and Applicable U.S. Branches.
Both the House version and the Senate Version include an increase in the BEAT rate from 10% to 12.5% for Applicable U.S. Corporations and Applicable U.S. Branches.
Both versions would extend the tax base for BEAT purposes for Applicable U.S. Corporations and Applicable U.S. Branches. In particular, both the House version and the Senate Version include the following changes to the BEAT calculation rules in respect of Applicable U.S. Corporations and Applicable U.S. Branches:
– Require Applicable U.S. Corporations and Applicable U.S. Branches to include capitalized amounts (other than for depreciable/amortizable property or inventory) in the BEAT taxable base;
– Apply the BEAT, with respect to Applicable U.S. Corporations and Applicable U.S. Branches, with respect to “base erosion payments,” even if such “base erosion payments” are otherwise subject to U.S. withholding tax;
– Eliminate, with respect to Applicable U.S. Corporations and Applicable U.S. Branches, the BEAT exemption for certain clean energy tax credits; and
– Eliminate, with respect to Applicable U.S. Corporations and Applicable U.S. Branches, the exception under the existing BEAT rules for certain amounts paid or accrued by the U.S. corporation (or U.S. branch) to related foreign parties for services that meet the requirements for eligibility for the services cost method (SCM) (e.g., certain cost-plus service payments).
Impact
The Senate Version reinforces and clarifies the House’s intent to impose a higher and broader BEAT liability on U.S. corporations and U.S. branches of foreign corporations that are majority-owned by persons from offending foreign countries imposing what the administration perceives as “unfair foreign taxes.” These changes are designed to ensure that base erosion payments to related parties in offending countries are more likely to be subject to the BEAT, and that taxpayers cannot avoid the penalty through capitalization or by relying on certain exceptions. The result is a more robust anti-base erosion regime targeting entities with substantial connections to countries imposing unfair foreign taxes.
7. Understanding Extraterritorial Tax and Discriminatory Tax and their Relevance under the Senate Version
As discussed above, the proposed tax increases would be triggered when a foreign country is classified as an “offending foreign country,” a designation that applies if the country imposes either an “extraterritorial tax” or a “discriminatory tax.” An extraterritorial tax generally refers to a foreign tax imposed on a corporation based on income or profits a related person earns, determined through ownership chains, without requiring that the taxed income arise from the corporation’s own direct or indirect ownership. This can include mechanisms like an Undertaxed Profits Rule (UTPR), which taxes income beyond the country’s jurisdictional reach.
A discriminatory tax, on the other hand, includes any “digital services tax” or other tax structures that effectively target foreign entities or U.S. persons more than domestic players. These taxes may apply primarily to non-residents, be imposed on gross revenues rather than net income (without allowing deductions) or be structured with thresholds and exemptions that exclude most domestic taxpayers. They also tend to fall outside of international double tax treaties.
The primary enforcement mechanism in Section 899(a)(1) applies increased U.S. tax rates, including higher withholding tax and corporate income tax rates, on “applicable persons” tied to countries that impose “extraterritorial taxes.” Thus, the operative section does not include “discriminatory tax,” and the key statutory trigger is that the foreign country’s tax must meet the definition of an extraterritorial tax. Importantly, if a country imposes only a discriminatory tax, the increased U.S. tax rates under 899(a)(1) are not activated.
While discriminatory taxes do not independently trigger increased U.S. tax rates, they still carry significant consequences under Section 899(f), particularly in relation to the BEAT, as discussed above. If a U.S. corporation or U.S. branch of a foreign corporation is majority-owned by persons from an “offending foreign country,” which includes those imposing discriminatory taxes, it becomes subject to more stringent BEAT rules. These taxes are seen as imposing a disproportionate burden on U.S. taxpayers through intentional or structural targeting. Furthermore, the secretary is required to maintain a list of such offending countries, reinforcing compliance through regulatory oversight. In short, without invoking elevated tax rates, discriminatory tax regimes may trigger adverse tax consequences for affiliated U.S. businesses through BEAT modifications and broader enforcement mechanisms.
Conclusion
The Senate’s changes to Section 899 introduce important taxpayer protections (notably for portfolio interest), cap the additional U.S. withholding tax under Section 899 at 15% (as opposed to a 20% cap the House proposed), provide more time for compliance, clarify the mechanics of the new penalty regime, and expand regulatory flexibility. The Senate Version also seeks to expand the BEAT regime’s applicability to almost any U.S. corporation that is majority-owned (more than 50%) by persons resident in “discriminatory foreign countries,” or any U.S. branch of a foreign corporation resident in a “discriminatory foreign country.”
The full U.S. Senate is expected to debate the Senate Version in the days ahead, where additional changes may be made. Taxpayers and withholding agents should review these changes carefully and monitor further developments as the legislative process continues.