Update – June 27, 2025 – The 899 Penalty Tax has been removed from the “Big Beautiful Bill”:
Update – June 22, 2025:
The Senate version of the Big Beautiful has been released. The full text is here:
https://www.finance.senate.gov/imo/media/doc/finance_committee_legislative_text_title_vii.pdf
In general, the Senate version retains the substance and principles of the House version.
The Senate version begins on page 138.
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Attention (At Least) Residents Of Countries With DSTs (“Digital Services Tax):
The Trump administration’s “Big Beautiful Bill” includes a provision to impose punitive taxes on nonresident aliens, with U.S. source income, who are residents of countries that have “Digital Services Taxes” (and other taxes applying to U.S. persons that they deem to be unfair).
This is “pretty rich” coming from the one country in the world that through it’s “citizenship tax” regime imposes taxation on the non-U.S. source income of received by people who don’t live in the United States!
At present the following countries (including Canada) impose DSTs. Note that the imposition of certain kinds of taxes (in addition to DSTs) may subject individual nonresident aliens to punitive taxation.
Generally, the law would impose, in addition to the existing U.S. tax, an additional tax, ranging from an additional 5% to an additional 20%.
Bottom Line:
Nonresident aliens who hold U.S. securities, U.S. real estate or have income that is effectively connected to the United States (“ECI”) may want to consider liquidating these investments.
My initial reaction and analysis suggests that Canadian residents will be particularly impacted by this measure. I will update this post as necessary and appropriate. Nevertheless:
“To Be FORMWarned Is To Be FORMArmed!”
This will not effect immediately. You have time to ponder this and understand it. This will not take effect immediately.
To understand the reasons, tax and general methodology for this conclusion, read on …
The Ways And Means Committee Description
Sec. 112029. Enforcement of remedies against unfair foreign taxes.
Provision: This provision provides a response to certain unfair taxes, which include both discriminatory and extraterritorial taxes imposed on U.S. persons (or certain foreign entities owned by U.S. persons) by a foreign government. The provision applies a delayed effective date to allow time for negotiations and provides discretion for the Secretary of the Treasury to expand or narrow the definition of unfair taxes. The provision requires the Secretary of the Treasury to provide a list unfair taxes to aid withholding agents, who are permitted to rely on the published list in determining appropriate withholding rates and are granted relief from penalties and interest with respect to errors until January 1, 2027, if they demonstrate best efforts were made at compliance.
JR Commentary: Unfair taxes INCLUDE discriminatory (applied disproportionately on U.S. persons – Canada’s Digital Services Tax?) or extraterritorial taxes (Canada’s Underused Housing Tax?). It appears that the Treasury Secretary has the discretion to expand the definition of “unfair taxes”.
At present the bill specifically identifies “digital services taxes” and the Pillar 1 UTPR taxes. But, these are only examples and this will be a “facts and circumstances” based determination.
The provision responds to unfair taxes by increasing the rate of tax generally applicable to certain taxpayers connected to the foreign jurisdiction. Affected taxpayers generally include the foreign government, resident individuals, resident corporations, resident foreign private foundations, and entities owned by such persons. The increases apply to certain income, withholding, and excise taxes imposed on non-residents. The rate of tax-imposed increases from the rates otherwise applicable under current law in five percent increments for each year the unfair tax is imposed, until either the unfair tax is removed or the tax reaches a maximum amount equal to the relevant statutory rate plus 20 percent.
JR Commentary: Clearly the impacted taxpayers include those who are “resident” of the country imposing the objectionable tax. The language is “connected to the foreign jurisdiction”.
The provision also applies to certain domestic entities that are owned by a tax resident of a foreign jurisdiction that imposes an unfair tax. These domestic entities are subject to certain modifications to the base erosion anti-abuse tax (BEAT) that expands the scope of entities subject to the minimum tax, increases the applicable rate, reduces the benefits of certain credits, and expands the taxable base to include certain payments that are currently excluded.
JR Commentary: This will make it more expensive for business expansion to America!
The-One-Big-Beautiful-Bill-Section-by-Section
Implementing The Description – The Text Of The Actual Bill
The proposed Section 899 is “SEC. 112029. ENFORCEMENT OF REMEDIES AGAINST UNFAIR FOREIGN TAXES” begins on page 294 of the “Big Beautiful Bill“. A pdf version of the bill is here:
Although drafted in a confusing way S. 899 is triggered by an “unfair tax” imposed by a foreign county. The analysis is composed of the following parts:
1. What are the “unfair taxes”, imposed by the discriminatory foreign county, that trigger the punitive tax penalty?
2. Who is an “applicable person” who is subject to the penalty?
3. How are different income streams impacted by the proposed penalties?
4. How might tax treaties impact the penalty taxes?
5. – Conclusion – with basic examples for individuals who are tax residents of Canada, The UK, France and any other country with a DST …
Let me begin by summarizing how I believe this is intended to operate. Although, this is an oversimplification, I read this as saying:
If a nonresident alien (taxable only on U.S. source income) is a resident (or possibly citizen) of a country that imposes an unfair or extraterritorial tax on a U.S. citizen or corporation, then any U.S. source income will be subjected to a penalty tax. The penalty tax is a tax IN ADDITION to the taxes that would be payable without the new Section 899.
I will now elaborate on each Part.
Part 1 – What are the “unfair taxes”, imposed by a discriminatory country, that trigger the punitive tax penalty?
This is defined in 899(c) starting on page 307 of the “Big Beautiful Bill”. The statute includes:
(c) UNFAIR FOREIGN TAX .—For purposes of this section
(1) IN GENERAL .—The term ‘unfair foreign tax’ means an undertaxed profits rule (UTPR), digital services tax, diverted profits tax, and, to the extent provided by the Secretary, an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose indicating the tax will be economically borne, directly or indirectly, disproportionately by United States persons. Such term shall not include any tax which neither applies to
(A) any United States person (including a trade or business of a United States person),
(B) any foreign corporation (including a trade or business of such foreign corporation) if the foreign corporation is a controlled foreign corporation and more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation) is owned (within the meaning of section 958(a)) by United States persons.
(2) EXTRATERRITORIAL TAX .—The term ‘extraterritorial tax’ means any tax imposed by a foreign country on a corporation (including any trade or business of such corporation) which is de termined by reference to any income or profits received by any person (including any trade or business of any person) by reason of such person being connected to such corporation through any chain of ownership, determined without regard to the ownership interests of any individual, and other than by reason of such corporation having a direct or indirect ownership interest in such person.
(3) DISCRIMINATORY TAX .—The term ‘discriminatory tax’ means any tax imposed by a foreigncountry if –
(A) such tax applies more than incidentally to items of income that would not be considered to be from sources, or effectively connected to a trade or business, within the foreign country under the rules of part I of this sub-chapter if such part were applied by treating such foreign country as though it were the United States,
(B) such tax is imposed on a base other than net income and is not computed by permitting recovery of costs and expenses,
(C) such tax is exclusively or predominantly applicable, in practice or by its terms, to nonresident individuals and foreign corporations or partnerships (as determined under rules similar to paragraphs (4) and (5) of section 7701(a) by treating the foreign country as though it were the United States) because of the application of revenue thresholds, exemptions or exclusions for taxpayers subject to such foreign country’s corporate income tax, or restrictions of scope that ensure that substantially1 all residents (other than foreign corporations and partnerships (as so determined)) supplying comparable goods or services are excluded from the application of such tax, or
(D) such tax is not treated as an income1 tax under the laws of such foreign country or is otherwise treated by such foreign country as outside the scope of any agreements that are in force between such foreign country and one or more other jurisdictions for the avoidance of double taxation with respect to taxes on income.
(4) EXCEPTIONS .—Except as otherwise provided by the Secretary, the terms ‘extraterritorial tax’ and ‘discriminatory tax’ shall not include any generally applicable tax which constitutes—
(A) an income tax generally imposed on the income of citizens or residents of the foreign country, even if the computation of income includes payments that would be foreign source income under part I of this subchapter,
(B) an income tax which would be an unfair foreign tax (determined without regard to this subparagraph) solely because it is imposed on the income of nonresidents attributable to a trade or business in such foreign country,
(C) an income tax which would be an unfair foreign tax (determined without regard to this subparagraph) solely because it is imposed on citizens or residents of such foreign countryby reference to the income of a corporate subsidiary of such person,
(D) a withholding tax, or other gross basis tax, on any amount described in section 871(a)(1) or 881(a), other than any withholding tax, or other gross basis tax, imposed with respect to services performed by persons1
other than individuals,
E) a value added tax, goods and services tax, sales tax, or other similar tax on consumption,
(F) a tax imposed with respect to transactions on a per-unit or per-transaction basis rather than on an ad valorem basis,
(G) a tax on real or personal property, an estate tax, a gift tax, other similar tax,
(H) a tax which would not be an extraterritorial tax or discriminatory tax (determined without regard to this subparagraph) except by reason of consolidation or loss sharing rules that generally apply only with respect to
income of tax residents of the foreign country,1or
‘‘(I) any other tax identified by the Secretary for purposes of this paragraph.
Part 2 – Who is an “applicable person” who is subject to the penalty?
This is defined in 899(b) starting on page 305 of the “Big Beautiful Bill”. There are many categories of “applicable person(s)”. Focusing on individuals, the statute reads:
(b) APPLICABLE PERSON .—For purposes of this section—
(1) IN GENERAL .—Except as otherwise provided by the Secretary, the term ‘applicable person’ means
(B) any individual (other than a citizen or resident of the United States) who is tax resident of a discriminatory foreign country
Presumably “tax resident” is defined by the laws of the other country.
Part 3 – How are different income streams impacted by the proposed penalties?
The governing principle is that “U.S. source” income received by non-U.S. persons will be subject to the penalty tax. Therefore, we (1) look to see how a particular U.S. income stream is taxed to a non-U.S. person and (2) impose the appropriate penalty tax based that income source.
The relevant income streams and tax rates include (but may not be limited to):
I. Rates Of Tax Imposed On Taxable Income
– U.S. source income received by foreign corporations:
IRC S. 11 – 21% corporate tax + the applicable penalty
FDAP Income received by individuals:
IRC S. 871(a) – FDAP – 30% + the applicable penalty
II. Withholding Taxes Generally
FIRPTA Withholding on the sale of U.S. Real Estate:
IRC S. 1445(aP – FIRPTA – 15% + the applicable tax penalty
IRC 1441(a) – Withholding tax on nonresident aliens 30% + applicable penalty tax
IRC 1442(a) – withholding tax on foreign corporations 30% + applicable penalty tax
and more …
Part 4 – How might tax treaties impact the penalty taxes?
There is nothing in the text of the legislation that speaks to treaties. Therefore, the treaties will still apply and certain nonresident aliens will enjoy reduced treaty rates. The penalty taxes will be added to the tax rates.
However, by adding the penalty taxes to the rates guaranteed by the tax treaties, the United States is clearly overriding its tax treaties. It would be interesting to see a challenge to the tax based on the concept of a “tax treaty override”.
Part 5 – Conclusion – with basic examples for individuals who are tax residents of Canada, The UK, France and any other country with a DST …
It appears that ANY country with a DST will be deemed to be a discriminatory country. Let’s imagine the following:
– A tax resident of Canada with U.S. source dividends: The treaty reduces the tax to 15%. The penalty tax will add 5% to the tax for the first year and 5% for each additional year until the tax rate reaches 35%.
– A tax resident of Canada with a U.S. source pension: The treaty reduces the tax to 15%. The penalty tax will add 5% to the tax for the first year and 5% for each additional year until the tax rate reaches 35%.
– A tax resident of Canada owns a U.S. vacation home: The FIRPTA rule mandates withholding of 15% of the proceeds of the sale. The penalty tax will add 5% to the tax for the first year and 5% for each additional year until the tax rate reaches 35%.
(Presumably the Canada Revenue Agency would/should allow the penalty tax to be used as a credit against Canadian income taxes owing. But, we can’t be sure. No matter what, the cost to nonresident aliens to having U.S. securities and real estate will be higher.)
John Richardson – Follow me on X.com @ExpatriationLaw
Appendix – helpful and further reading …
The OECD and U.S. Tax Treaties And The Historical origins of IRC 899
When writing history, the first question is where to begin. The beginning is about 100 years ago in the 1920s when the first tax treaties came into being. The tax treaties of 100 years ago have two provisions that have heavily influenced the movement toward the reform of U.S. International tax 100 years later.
First feature of the tax treaties: This was a time when multinational companies exported capital to developing countries. For example, a British multinational might undertake a mining project in a developing country. The multinational would export the capital and hire local labour to do the job. The tax treaties assigned the taxing rights to the country of residence (Britain) and deprive the source country (where the mine was located) of the taxing rights. This arrangement was based on the British multinational NOT having a permanent establishment in the source country. The practical result was that the multinationals of the great powers were able to come into developing countries and strip the profits out of those countries. Whether this arrangement made sense or not, these treaties arose at at time when multi-nationals did export capital to the developing countries. One hundred years later U.S. digital companies (Facebook, Google, etc.) are able to sell to the residents of other countries without exporting any capital and without having a permanent establishment. Hence, the U.S. and standard OECD tax treaties effectively allow tech companies (because they don’t have a permanent establishment) from being subject to taxation on their profits in those countries (under the terms of the tax treaty). As a result, many countries have enacted DSTs, which are NOT governed by tax treaties, are a tax based on revenue and allow for the profits of nonresident tech companies (remember the resident tech companies are subject to income taxation) to be taxed. The United States deems DSTs to be unfair taxes.
Second feature of the tax treaties: The US and OECD tax treaties is that they allow of multinationals to use the provisions of tax treaties to allocate the profits of multi-nationals to “low tax” jurisdictions. For example, this is the reason that Apple is in Ireland. (Interesting the U.S. GILTI rules enacted at the end of 2017 were a deliberate attempt to impose a minimum tax rate on corporations that were owned substantially by “U.S. Persons”.)
I have previously argued that the tax treaties of 100 years ago should not be used to guide international tax policy in the 21st century.
US Tax Treaties Should Reflect The 21st Century And Not The World Of 100 Years Ago
Beginning in approximately 2012, the international community generally became concerned with the “apparent” ability of multi-nationals to avoid taxation in the jurisdiction in the country where the profits were actually being earned. The OECD responded with the BEPS program. In approximately 2020 (at the request of the Biden administration was a leader in promoting the OECD:
– Pillar 1 (giving some taxing rates to the countries where digital products were sold to the country’s residents)
– Pillar 2 (a 15% minimum rate of international corporate taxation). A feature of Pillar 2 is that it includes the UTPR “Under Taxed Profit Rule”) that would allow non-U.S. countries to directly tax the profits of U.S. companies who do NOT do business in the country imposing the tax. (Note that this is exactly what the United States does by imposing its U.S. citizenship-based extraterritorial tax regime on the rest of the world.
In any case, the United States now finds Pillar 1, Pillar 2, DSTs and certain other taxes as infringing on their tax sovereignty. As a result of this perception of unfairness, in 2023 the U.S. via Jason Smith proposed the “Defending American Jobs And Investment Act”. In describing the 2023 Bill, PWC reported that:
In brief
House Ways and Means Committee Chairman Jason Smith (R-MO) and all Ways and Means Republicans on May 25, 2023 introduced the Defending American Jobs and Investment Act. The proposed legislation would increase income tax and withholding tax rates, initially by 5 percentage points, increasing up to 20 percentage points on certain foreign citizens, foreign corporations, and foreign partnerships of any foreign country that is listed in a report on the extraterritorial taxes and discriminatory taxes of foreign countries (‘Report’) submitted by the Secretary of the Treasury (‘Secretary’) to certain Congressional committees.
“This bill sends a clear warning to any nation tempted to exploit the success of our workers and businesses for its own gain,” said Chairman Smith, adding that Ways and Means Republicans are prepared to consider additional tax and trade countermeasures. “We urge our global trading partners to reject all unfair taxes aimed at Americans, and we encourage countries, the OECD, and multinational companies to work toward solutions that will protect American sovereign taxing rights and avoid escalating tax and trade countermeasures.”
The increases in income tax and withholding tax rates would take effect the day after the 180-day period beginning on the date the first Report is submitted which lists a foreign country.
The legislation also includes other remedies against a listed foreign country with extraterritorial taxes and discriminatory taxes. As described further below, such remedies could include limitations on Federal Government procurement, as well as limitations with respect to bilateral tax treaties or trade agreements.
The takeaway: The bill appears to take aim at the Organisation for Economic Co-operation and Development (OECD) two-pillar solution and at countries that introduce digital service taxes (DSTs), with the extraterritorial tax focusing on the undertaxed profits rule (UTPR) and the discriminatory tax focusing on DSTs. While Democratic party control of the Senate may prevent Congressional approval of this proposal in the near term, the bill nevertheless provides further indication of the dissatisfaction among Congressional Republicans with the current OECD process and some of its policy direction. Companies should continue to monitor these developments while also ensuring their organizations are preparing for Pillar Two implementation by multiple countries starting in 2024.
Clearly the United States was complaining that other countries were imposing extra-territorial taxation on American companies, while at the same time the United States (via the citizenship tax regime) was (and continues) to impose extra-territorial taxation on other countries. Predictably, Dr. Laura Snyder (President of SEAT) wrote a brilliant article (published in Tax Notes) titled “Discriminatory Taxes and Congress: “Do as I Say, Not as I Do“.
A PDF of the Snyder article is here:
The 2023 Bill was the impetus for the February 2025 of the new “H.R. 591: Defending American Jobs and Investment Act“. (Excellent commentary from KPMG is here.) Section 899 of the “Big Beautiful Bill” “is H.R. 591: Defending American Jobs and Investment Act”.
Excellent initial commentary on Section 899 has been provided by GreeneurgTrauig in their May 16, 2025 article: