US comes a step closer to introducing retaliatory tax measures

In the US, Congress has been considering the 'One Big Beautiful Bill Act' Bill (the "Bill"). The Bill was passed by the House of Representatives on 22 May 2025, and is now heading to the Senate.

From a tax perspective, the Bill comprises both domestic and international provisions, including an extension of soon-to-expire tax cuts that were passed in 2017, during President Trump's first term in office. Additionally, and of particular interest to certain non-US persons, are the Bill's retaliatory tax measures which could, if passed in their present form, impact UK corporates with US operations. These measures are considered further below.

Retaliatory tax measures – Section 899

The Bill (at section 112029) introduces a new section 899 'Enforcement of Remedies Against Unfair Foreign Taxes' into the US Internal Revenue Code.

‘Unfair foreign taxes’ are defined by the Bill as any:

• Undertaxed Profits Rule (UTPR);
• Digital Services Tax (DST);
• Diverted Profits Tax (DPT); or
• any “exterritorial, discriminatory or other tax as identified by the Secretary of Treasury that is disproportionately borne by US persons”. 

A country that imposes any of these taxes may be designated a "discriminatory foreign country" (a "DFC"). The UK currently has all three of the identified taxes, as do many other jurisdictions, including Australia, Canada, Japan and many EU countries.

Proposed s899 would impose two types of retaliatory measures.

Retaliatory measure 1: increased taxes

The first retaliatory measure involves the imposition of increased taxes on non-US taxpayers 'connected' to a DFC. The definition of 'connection' is wide and includes individuals and companies tax resident in the DFC, and also trusts, partnerships and other bodies created, organised or owned in or from a DFC.

The taxes that will be increased are those that are imposed on in-scope non-US residents in connection with income they derive from the US. This includes, most commonly, withholding tax on interest, dividends and royalties.

Rates of withholding tax can be increased by 5% for every year the 'unfair' foreign tax is imposed, up to a maximum of 20% above the currently applicable rate. Accordingly, a dividend paid to the UK from the US which is currently subject to zero withholding tax (under the US-UK treaty) could eventually be subject to a 20% withholding.

Retaliatory measure 2: modification of the BEAT rules

The second retaliatory measure involves modification of the US Base Erosion and Anti-Abuse Tax ("BEAT") rules which would apply to a US corporation owned, directly or indirectly, by an entity or entities resident in a DFC. The existing BEAT rules restrict the deductibility of certain expenses of US entities owned from outside the US, and are generally subject to thresholds which mean that relatively few groups are subject to the provisions. The modified BEAT would apply as follows:

• Scope would be expanded as it would be applied as if the corporation satisfied the $500 million gross receipts test and base erosion percentage requirements. Consequently, these thresholds would effectively be removed, so that BEAT would apply to many smaller groups whose US operations are currently outside the application of the standard BEAT provisions.
• The favourable treatment of certain tax credits (eg, R&D) would be eliminated, and the base erosion minimum tax amount would be calculated using a higher percentage of 12.5% rather than 10%.
• Modified BEAT would treat as a Base Erosion Payment and Base Erosion Tax Benefit any amounts paid to foreign related parties that are capitalised, other than amounts for the purchase of depreciable property or amortisable property or inventory.
• Payments for certain related-party services currently excluded from BEAT under the Service Cost Method would be considered base erosion payments.

Timing and next steps

These retaliatory measures would apply to taxable years that begin after the later of:

• 90 days following enactment of the proposal;
• 180 days following enactment of the unfair foreign tax; or
• the first date an unfair foreign tax of the relevant country begins to apply.

The Republicans are aiming to have the Bill signed by 4 July 2025. For the UK, this means these measures would come into effect in 2026 at the earliest. 

However, the delayed effective date of these measures is expressly stated (in official explanatory notes to the Bill) as being "to allow time for negotiations", suggesting that the US administration may be looking for countries to make concessions on their "unfair taxes" in return for falling outside the scope of the measures.

Prior to the Bill coming into effect, it must, in any event, be approved by Congress. The House of Representatives approved the Bill (by one vote) on 22 May 2025, and it now proceeds to the Senate for approval. The Senate may amend or even remove the retaliatory provisions, which have been criticised by some as disincentivising foreign investment, at a time when US Government debt is growing. However, as the Republican party holds the majority of seats in the Senate, approval of these measures in some form is a distinct possibility.

A link to an analysis of these measures from an Australian perspective can be found in our Tax Australia Notes here.