Update: Senate Finance Committee Releases Its Version of Section 899 of the One Big Beautiful Bill

On May 22, the U.S. House of Representatives voted to approve the One Big Beautiful Bill (the House Bill), which contained a new addition to the U.S. Internal Revenue Code — Section 899 (House Bill Section 899). On June 16, the U.S. Senate Finance Committee Chairman Mike Crapo (R-ID) released legislative text within the Finance Committee’s jurisdiction for inclusion in Senate Republicans’ budget reconciliation bill (the Senate Finance Draft), which contains a modified version of Section 899 (Senate Finance Section 899).

House Bill Section 899 and Senate Finance Section 899 are broadly similar in scope but contain some key differences:

• Portfolio Interest and Similar Amounts: The text of House Bill Section 899 was not entirely clear on whether U.S.-source interest income (and original issue discount) that qualified for the “portfolio interest” exemption could be subject to Section 899 withholding (i.e., increased from zero percent). Alternatively, Senate Finance Section 899 explicitly provides an exception for U.S.-source interest income qualifying under the portfolio interest exemption, as well as for (i) original issue discount on certain short-term obligations (i.e., those payable 183 days or less from the date of original issue) and tax-exempt obligations, (ii) deposit interest, (iii) income derived by a foreign central bank of issue from bankers’ acceptances, (iv) interest-related dividends and short-term capital gain dividends received from a regulated investment company and (v) any similar amount specified by the Treasury.

• Increases to Rates: House Bill Section 899 would incrementally increase tax rates by 5% each year up to a cap of 20% over the statutory rate (presumably ignoring tax treaty rates). For example, a taxpayer entitled to 5% withholding on dividends under a tax treaty with the United States could ultimately face a maximum 50% withholding tax rate on dividends. In contrast, under Senate Finance Section 899, the applicable rate (presumably accounting for tax treaty rates) will be increased by 5% in the first year, by a total of 10% in the second year, and by a total of 15% for any subsequent year. Accordingly, a taxpayer entitled to 5% withholding on dividends under a tax treaty with the United States could ultimately face a maximum 20% withholding tax rate on dividends.

• Base Erosion and Anti-Abuse Taxes (BEAT): House Bill Section 899 would (i) apply BEAT to certain non-publicly traded corporations that are more than 50-percent owned (by vote or value) by other applicable persons regardless of otherwise applicable minimum gross receipts and base erosion percentage thresholds, (ii) increase the BEAT rate from 10% to 12.5% and (iii) make certain other changes that would be expected to increase potential BEAT liability. Senate Finance Section 899 generally tracks House Bill Section 899 but is expanded to cover certain U.S. branches of non-publicly traded foreign corporations and reapplies the base erosion percentage thresholds prior to application of the BEAT, albeit at a lower threshold of 0.5% rather than 2.0%.

• Scope of Unfair Foreign Taxes: Generally, the definition of “unfair foreign taxes” in Senate Finance Section 899 is similar to House Bill Section 899, but Senate Finance Section 899 requires action by the Treasury to apply some of the more broadly written categories of unfair foreign taxes.
  • Senate Finance Section 899 clearly characterizes a “UTPR” or “undertaxed profits rule” as an “extraterritorial tax” and a “digital service tax” as a “discriminatory tax.” Both extraterritorial taxes and discriminatory taxes qualify as “unfair foreign taxes,” thus triggering the application of the increased rate in taxes.
  • While House Bill Section 899 explicitly classifies “diverted profits taxes” as unfair foreign taxes, Senate Finance Section 899 fails to do so. Senate Finance Section 899 includes a residual category of taxes imposed by a foreign country enacted with a public or stated purpose indicating that the tax will be economically borne, directly or indirectly, disproportionately by United States persons, which may include diverted profits taxes.
    • Unlike House Bill Section 899, this residual category in Senate Finance Section 899 does not appear to be self-effectuating and instead applies only “to the extent provided by the Secretary.”
    • Additionally, the more broadly defined categories of discriminatory taxes (e.g., those that apply more than incidentally to items of income that would not be considered from U.S. sources under U.S. tax principles) applies only “to the extent provided by the Secretary.”
  • Finally, the broad exceptions (e.g., those that apply to income tax generally imposed on the income of citizens or residents of a foreign country) only appear to apply to extraterritorial taxes (other than a UTPR and digital service taxes).

• Applicable Date: Senate Finance Section 899 provides that the provision generally will be effective on the first day of the first calendar year beginning on or after the later of (i) one year after enactment (extended from 90 days after enactment in House Bill Section 899), (ii) 180 days after the date of enactment of an unfair foreign tax that causes a country to be considered an offending foreign country or (iii) the first date that the unfair foreign tax begins to apply. Therefore, the earliest date that calendar year taxpayers would be subject Senate Finance Section 899 would be January 1, 2027.

President Donald Trump has indicated a strong desire for the Senate to pass its version of the One Big Beautiful Bill by July 4. We will continue to keep readers posted on any developments as this legislation moves through Congress.