On May 22, 2025, the U.S. House of Representatives narrowly passed the Budget Reconciliation Legislative Recommendations Related to Tax after making amendments. The bill will now be considered by the Senate.

The bill includes a proposal to a add a new section 899, “Enforcement of Remedies Against Unfair Foreign Taxes,” to the Internal Revenue Code. The new section targets individuals, corporations and governments of “discriminatory foreign countries” defined as those that impose one or more “unfair taxes” with a “public or stated purpose that the tax be economically born, directly or indirectly, disproportionately by U.S. persons.”

What are “unfair taxes” and “discriminatory foreign countries”?

Unfair taxes explicitly include an Undertaxed Profit Rule (UTPR) under OECD Pillar Two, a Digital Services Tax (DST), a Diverted Profits Tax (DPT), and, to the extent provided by the Secretary of the Treasury, an extraterritorial tax, or discriminatory tax. Countries that have adopted such taxes are considered “discriminatory foreign countries”. Definitions of “extraterritorial tax” and “discriminatory tax” can be found in the bill.

Canada would be considered a “discriminatory foreign country” because it has enacted (June 2024) a Digital Services Tax. Canada has also enacted (June 2024) a Global Minimum Tax but did not include the UTPR.  However, draft legislation released in August 2024 proposed the addition of the UTPR. In January 2025, the White House via an Executive Order declared the Global Tax Deal has no force or effect within the United States.

Implications of Sections 899

Section 899 increases certain withholding taxes for persons who are tax residents in, or are controlled by a tax resident in, a “discriminatory foreign country”. Specifically, it increases tax rates related to:

• Payments of fixed or determinable annual or periodical gains, profits, and income (FDAP income), certain capital gains, and certain other types of U.S. source income.
  • At present: FDAP income is nominally subject to a statutory 30% gross-basis tax withheld at its source (under Internal Revenue Code, i.e. IRC Sections 1441(a) and 1442(a)); however, in many cases FDAP income is subject to a reduced rate of, or entirely exempt from, U.S. tax under the Internal Revenue Code or a bilateral income tax treaty. Interest on deposits with domestic banks and savings and loan associations, and certain amounts held by insurance companies, is U.S.-source income but is currently exempt from the 30% tax when paid to a foreign person.
• Dispositions of United States real property interests.
  • At present: Taxed at a 15% rate (specified in IRC Section 1445(a)).
• The rate applicable in the case of certain dispositions, distributions, or other transactions involving or connected to a person. (Rate specified in IRC Section 1445(e)).

Section 899 also increases:

• The 21% corporate income tax rate imposed on a foreign corporation’s ECI (i.e. effectively connected with the conduct of a trade or business within the United States).
• The 30% tax rate imposed on dividend equivalent amounts of a branch (i.e., branch profits tax).
• The 4% tax rate imposed on U.S.-source gross investment income of foreign private foundations.

How are rate increases determined?

When it comes to withholding taxes, non-U.S. tax residents may be subject to a 30% statutory withholding tax rate on U.S. dividends. In Canada’s case, this may be reduced to typically 15% pursuant to the Canada-U.S. Tax Treaty.

Section 899 increases the Tax Treaty tax rate by 5 percentage points each year, stating “the rate increases are limited such that the rate cannot exceed the relevant statutory rate … by more than 20 percentage points.” Thus, the maximum applicable withholding tax rate would be 50% (i.e., the statutory rate of 30% plus 20 percentage points) on U.S.-source dividends to the extent that a country remains a discriminatory foreign country. 

Canadian residents are generally not subject to U.S. withholding tax on interest income from U.S. sources – portfolio interest, bank deposit interest, interest-related dividends, and qualified foreign pension funds. Section 899 does not appear to impact the types of income to which no tax is imposed.

The annual 5 percentage point increases would also apply to the corporate income tax rate imposed on foreign corporation’s ECI, up to maximum of 20 percentage points, resulting in a 41% tax rate.

The branch profits tax and the tax on U.S.-source gross investment income of foreign private foundations would also increase by 5 percentage points per year, up to a maximum increase of 20 percentage points, resulting in a maximum applicable withholding tax rate of 50%.

Effective Dates

The proposal is effective on the date of enactment.

The rate increases would apply:

• 90 days after the date of enactment of the proposal,
• 180 days after the date of enactment of the unfair foreign tax that causes such country to be treated as a discriminatory foreign country, and
• the first date that the unfair foreign tax of such country begins to apply; and before the last date on which the discriminatory foreign country imposes an unfair foreign tax.

BEAT

Finally, Section 899 would modify the Base Erosion and Anti-Abuse Tax (BEAT) with respect to certain
corporations that are more than 50% owned (by vote or value) by tax residents of discriminatory foreign countries (including U.S. subsidiaries of foreign corporations).

Impact on Revenue

The Joint Committee on Taxation estimates the Enforcement of Remedies Against Unfair Foreign Taxes proposals will raise US$116.3 billion over the 2025-2034 period. Close to 90% of this increase in revenue is in the first 5 years of this period. Starting in 2033, the projections show the U.S. government is losing tax revenue as foreign investors and foreign subsidiaries scale back their activities in the U.S.

The U.S. government’s goal appears to be to convince foreign governments to rethink imposition of “unfair taxes” which they view as penalizing U.S. companies.