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On June 16, 2025, the U.S. Senate Finance Committee released its initial amendments to the “One Big Beautiful Bill Act” (H.R. 1) passed by the U.S. House of Representatives on May 22, 2025. Notably, the Senate Finance Committee’s amendments preserve, with modifications, the controversial “Revenge Tax” included in the House’s draft as a new Section 899 to be added to the U.S. Internal Revenue Code. The Revenge Tax under Section 899 operates by increasing tax burdens on “applicable persons” from “offending foreign countries” deemed to impose “unfair foreign taxes,” as well as on U.S. companies more than 50% owned by vote or value by persons from such offending countries.

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At the time of the publication of this Client Alert, our understanding is that the U.S. Department of the Treasury and its Organization for Economic Co-operation and Development (“OECD”) partners have entered into negotiations that could, from the U.S. Department of the Treasury’s perspective, alleviate the need for the inclusion of the Revenge Tax in the One Big Beautiful Bill Act. The Michael Best tax team will continue to monitor these developments and their impact on proposed Section 899 and the One Big Beautiful Bill Act on the whole.

Who: “Applicable Persons” from “Offending Foreign Countries”

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The Senate Finance Committee’s draft legislation introduces the concept of “offending foreign countries,” defined as jurisdictions that enforce either an “Extraterritorial Tax” or a “Discriminatory Tax” against U.S. persons or corporations more than 50% owned by vote or value by U.S. persons (together, “unfair foreign taxes”).

Extraterritorial Taxes means, generally, any tax imposed by a foreign country on a corporation which is determined by reference to any income or profits received by any person by reason of such person being connected to such corporation through any chain of ownership. Such term shall include any tax imposed under a “UTPR” or “undertaxed profits rule.”

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Discriminatory Taxes include digital services taxes (“DSTs”) and any similar taxes identified at the discretion of the U.S. Secretary of the Treasury.

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The increased U.S. income and withholding taxes and the Super BEAT discussed below will apply to “Applicable Persons,” defined as any foreign government of an offending foreign country; any individual (other than a citizen or resident of the United States) who is a tax resident of an offending foreign country; any foreign corporation (other than those that are majority U.S.-owned) that is a tax resident of an offending foreign country; any private foundation that is created or organized in an offending foreign country; any foreign corporation (other than a publicly held corporation) more than 50% owned by vote or value by other Applicable Persons; any trust the majority of the beneficial interests of which are held (directly or indirectly) by other Applicable Persons; or any other entity (including branches) identified with respect to an offending foreign country by the U.S. Secretary of the Treasury. Foreign partnerships do not fall within the definition of “Applicable Persons,” as partnerships are viewed as an aggregate of their partners for the purposes of the proposed Section 899.

Why: The U.S. Government’s Response to Pillar Two of the OECD’s Global Anti-Base Erosion Model Rules and Foreign DSTs

The primary source of the “undertaxed profits rule” is Pillar Two of the OECD’s Global Anti-Base Erosion Model Rules (the “GloBE Rules”). The GloBE Rules implement a 15% global minimum tax rate that all multinational enterprises (“MNEs”) must pay. The GloBE Rules ensure this minimum through three separate but interconnected rules:

A Qualified Domestic Minimum Top-Up Tax (“QDMTT”), which allows countries the first right to tax their domestic entities at a 15% rate;

An Income Inclusion Rule (“IIR”), which imposes a top-up tax on a parent entity in respect of the low-taxed income of a constituent entity; and

An Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low-tax income of a constituent entity that is not subject to tax under an IIR, effectively allowing a country to increase taxes on a business unit if that business unit is part of a larger MNE that pays less than the proposed global minimum tax of 15% in another jurisdiction.

The expectation is that each jurisdiction would implement the QDMTT and IIR at the same time, and then would implement the UTPR at least 12 months later. Each of the QDMTT, IIR, and UTPR would take effect 12 months after their respective implementations in each jurisdiction, with the earliest implementations of the QDMTT and IIR having been made on January 1, 2024 (and thus with effect on January 1, 2025). Exceptions to the GloBE Rules would generally apply in the ogancase of taxpayers that have no foreign presence or have less than €750 million in consolidated revenues, government entities, international organizations, non-profit organizations, and entities that meet the definition of a pension, investment or real estate fund. These entities are excluded even if the MNE group they control remains subject to the rules.

On January 20, 2025, in the first hours of his second administration, President Trump issued an Executive Order stating that the United States will not implement the OECD’s Pillar Two GloBE Rules (the “Executive Order”). However, the Executive Order itself would not prevent the effects of the GloBE Rules from continuing to apply to U.S. MNEs in foreign countries that have enacted Pillar Two. As a result, on February 27, 2025, President Trump threatened to retaliate against other countries that impose the GloBE Rules on U.S. companies and also revived trade threats against foreign DSTs, which Trump included in his “Fair and Reciprocal Plan” for U.S. trade relations.

After President Trump’s threats of February 27, 2025, certain other governments, including the governments of Germany and the Netherlands, began reviewing their countries’ implementation of Pillar Two in more detail. For example, on February 26, 2025, in response to developments in the United States and prior to President Trump’s formal threat, Dr. Alexander Lorz, Finance Minister for the German state of Hesse, voiced concerns about the Pillar Two global minimum tax, advocating for a suspension of the initiative. Furthermore, on March 3, 2025, the Federation of German Industries (“BDI”) and other German trade associations, including the German Chamber of Commerce and Industry, Association of German Banks, and German Insurance Association, sent a letter to the European Commission requesting that the E.U. not move forward with the implementation of Pillar Two in order to avoid retaliatory measures from the United States.

It is our understanding that jurisdictions that have enacted a UTPR (via Pillar Two or otherwise) or a DST, and thus would be subject to the Revenge Tax under Section 899, are as follows:

UTPR: Australia, Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Indonesia, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovenia, South Korea, Spain, Sweden, Turkey, and the United Kingdom.

DST: Austria, Canada, France, Italy, Spain, Turkey, and the United Kingdom.

The U.S. Secretary of the Treasury would be tasked with maintaining a list of any offending foreign countries, along with clarifying whether their taxes fall under the Extraterritorial or Discriminatory Tax category.

What: Additional U.S. Income and Withholding Taxes and the Expansion of the “BEAT”

The Senate Finance Committee’s initial amendments to the specifics of the Section 899 Revenge Tax largely follow the House of Representatives’ approach, while clearly distinguishing between Extraterritorial Taxes and Discriminatory Taxes. Under the Senate Finance Committee’s proposal, Section 899 will introduce the following significant tax increases on Applicable Persons:

Tax Hikes on Applicable Persons from Offending Countries that Impose Extraterritorial Taxes

Under the Senate Finance Committee’s draft of Section 899, U.S. federal income and withholding tax rates would increase by 5% annually on Applicable Persons from offending foreign countries that apply Extraterritorial Taxes, up to a maximum increase of 15% above existing tax treaty or statutory rates, as applicable (reduced from a maximum of 20% above statutory rates in the House’s draft), unless the relevant Extraterritorial Taxes are repealed or otherwise revised by the relevant offending foreign country to exempt U.S. persons and their subsidiaries.

The increased tax rates would apply to (i) income effectively connected with a U.S. trade or business (“ECI”), but, in the case of individuals, limited only to gains on sales of U.S. real property interests subject to FIRPTA that would be treated as ECI; (ii) the 30% withholding rate applicable to fixed or determinable annual or periodical income (“FDAP”); (iii) the 30% “branch profits tax” applicable to U.S. branches of foreign corporations in lieu of dividend withholding that would be applicable if the branch were a standalone U.S. corporation; and (iv) the 4% excise tax on U.S. source gross investment income of foreign private foundations. Notably, if a tax treaty would otherwise reduce or eliminate one of the taxes described in the previous sentence, then the increased tax rates would still apply, just from the lower tax treaty rate baseline. By way of an example, the U.S.-Japan tax treaty provides for a 0% withholding rate on royalties. If the Senate Finance Committee’s draft of Section 899 is enacted, the withholding rates on U.S. source royalties paid by a U.S. payor to a Japanese corporation could increase to a maximum of 15%, unless Japan repeals or otherwise revises its Extraterritorial Tax to exempt U.S. persons and their subsidiaries.

Current exemptions from U.S. tax for portfolio interest, bank deposit interest, and certain regulated investment company dividends would not be affected by Section 899 under the Senate Finance Committee’s draft, clarifying an ambiguity in the House’s draft. Furthermore, to the extent a tax treaty would otherwise exempt tax, Section 899 also would not apply increased tax rates to individuals’ FIRPTA gains or corporations’ branch profits taxes.

Modification of the Base Erosion and Anti-Abuse Tax, or “BEAT,” into the “Super BEAT”

The Senate Finance Committee’s draft of Section 899 considerably expands the application of the base erosion and anti-abuse tax under Section 59A of the U.S. Internal Revenue Code, or “BEAT.” Under current law, the BEAT prevents foreign and domestic corporations from shifting profits outside of the United States by applying what is essentially a 10% minimum tax (scheduled to increase to 12.5% in 2026) to multinational corporations with gross receipts exceeding $500M annually. The BEAT only applies if corporations based in the United States make “base erosion payments” – that is, payments to related foreign corporations – that exceed 3% of the total deductions taken by the relevant corporation (the “Threshold Percentage”). Other provisions of the Senate Finance Committee’s draft of the One Big Beautiful Bill Act would reduce the Threshold Percentage from 3% to 2% and would increase the 10% minimum tax to 14%.

Under the Senate Finance Committee’s draft of Section 899, the “Super BEAT” would apply the BEAT minimum tax to non-publicly traded U.S. corporations that are majority-owned by vote or value by persons from offending foreign countries that apply either Extraterritorial Taxes or Discriminatory Taxes, as well as to U.S. branches of foreign corporations that are tax residents of such offending foreign countries. The “Super BEAT” would remove the $500M gross receipts threshold for application, reduce the Threshold Percentage from 3% of total deductions to 0.5%, deny certain credit-related offsets allowed under the BEAT, such as the low-income housing credit and renewable energy credit, and increase what qualifies as “base eroding tax benefits,” such as by including U.S. withholding taxes applicable to base eroding payments in the calculation of base erosion payments. Finally, amounts that a taxpayer capitalizes (rather than deducts) are also treated as base erosion payments under the proposed Super BEAT, with the notable exception of the purchase price of depreciable or amortizable property and inventory.

Of note, the Super BEAT would not apply to corporations that are at least 80% publicly traded by vote and value.

When: For Calendar Year Taxpayers, Tax Years Beginning on or After January 1, 2027

The Senate Finance Committee’s draft of Section 899 would take effect for tax years beginning on or after the date that is one year after enactment of the One Big Beautiful Bill Act, in contrast to the House’s version of Section 899, which would have taken effect only 90 days after the signing of the Act. For calendar taxpayers, this means that 2027 would be first tax year that Section 899 would have effect, assuming the Act is signed into law in 2025.

All provisions of the One Big Beautiful Bill Act, including proposed Section 899 of the U.S. Internal Revenue Code, are subject to change until final passage by the U.S. House of Representatives and the U.S. Senate. Section 899 is highly complex and the impact of the provisions of Section 899 will depend on a taxpayer’s specific facts and circumstances. Any clients or potential clients of Michael Best &amp; Friedrich LLP that are interested in further discussing the tax provisions of the One Big Beautiful Bill Act should reach out to one of the authors of this Client Alert.

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Senate Finance Committee Releases Draft Legislation Retaining Proposed “Revenge Tax” Under Proposed Section 899 of the U.S. Internal Revenue Code

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