The second Trump administration has made numerous announcements on trade and tariffs, but US tax policy is increasingly woven into the discussion on international trade. This includes the possibility of retaliatory US action in response to “discriminatory or extraterritorial taxes” imposed by other countries.
In our latest podcast US tax expert Claude Stansbury, UK tax expert Emily Szasz and international trade expert Lorand Bartels join Josh Critchlow to discuss the latest on this intersection of US tax and trade policy. Highlights from the podcast discussion are summarised in this blog post.
New proposed section 899
The US House Budget Reconciliation Bill, officially titled the “One Big Beautiful Bill Act”, was passed by the House of Representatives on 22 May 2025 and includes retaliatory US tax measures in response to “unfair foreign taxes” in a new proposed section 899 of the US tax code. Section 899 could have a significant impact on multinational groups with US operations.
At a high-level, the retaliatory tax measures in proposed section 899 are two-fold:
- firstly, it would increase applicable tax rates imposed on US source payments (including dividends and interest) and US trade or business income of, broadly, non-US individuals or non-US corporations that are tax resident in a “discriminatory foreign country” – a discriminatory foreign country being one that imposes an “unfair foreign tax”. The rate of tax would increase by 5% each calendar year, capped at the relevant statutory rate plus 20%. There are exceptions, including for corporations that are more than 50% owned directly or indirectly by US residents; and
- secondly, it would expand the application of the US Base Erosion and Anti-abuse Tax – or “BEAT” – rules to apply to corporations (other than publicly held corporations) where such corporation is more than 50 percent owned, directly or indirectly, by individuals or corporations tax resident in a discriminatory foreign country or by a government of a discriminatory foreign country. The computation of the BEAT tax base would also be expanded in these circumstances.
These measures would apply automatically where the relevant gateway conditions are met – they are not discretionary measures triggered by additional actions (for example, issuing an executive order).
Further details of these measures are discussed in the podcast, including the interaction of section 899 with treaty relief.
Which taxes are "unfair foreign taxes”?
Proposed section 899 expressly provides that the following are "unfair foreign taxes": digital services taxes (DSTs), the undertaxed profits rule (UTPR) of the OECD Pillar 2 global minimum tax rules and diverted profits tax (DPT). This list can be extended where the US Treasury determines taxes to be extraterritorial or discriminatory.
The inclusion of DSTs and the UTPR in this category is not a surprise. The current US administration is not planning to adopt the Pillar 2 global minimum tax rules and the US has expressed concerns about the UTPR for a number of years. However, it is potentially significant given the number of jurisdictions that have implemented, or are in the process of implementing, this rule - including the UK and most EU member states.
As discussed in further detail in the podcast, the US has a history of challenging DSTs using trade measures. US trade sanctions were previously imposed in response to a number of DSTs, including those implemented by the UK and some EU member states, but almost immediately postponed to allowed for agreement to be reached on the OECD’s Pillar 1 proposals. However, progress on the Pillar 1 proposals has stalled and these DSTs have remained in place, and it appears the US is now looking to challenge DSTs via tax, rather than trade, measures.
The UK and Australia have enacted a DPT. It is highlighted in the podcast that the UK therefore has three taxes that would be considered unfair for these purposes – all of which would need to be repealed in order to avoid being a “discriminatory foreign country” subject to the measures in proposed section 899.
Currently, VAT and sales taxes are expressly excluded from the definition of unfair foreign taxes in new proposed section 899, although this position could be reversed as the listed exclusions are subject to the US Treasury Secretary “providing otherwise”. This is notable given the current Trump administration has highlighted concerns with VAT from a trade perspective, which is feeding into the US/EU trade discussions. The background to the US approach on this issue is explained in the podcast, highlighting this is a revival of a historical debate on the operation of VAT rather than a new objection.
How soon could these measures apply?
Assuming the US Budget Reconciliation Bill is enacted by the beginning of October 2025 and an "unfair foreign tax" already applies in the relevant jurisdiction, the bulk of the proposed section 899 measures could apply from 1 January 2026.
As explained in the podcast, the US budget reconciliation procedure allows budget and tax related legislation to pass the US Senate with a simple majority vote, and given the Republican party has 53 seats, it is likely to be able to meet this threshold. However, this means the requirements of the budget reconciliation procedure will need to be adhered to - and this may present some material hurdles, including whether the Republican's proposed method of calculating the cost of extending existing tax cuts that are due to “sunset” is acceptable.
What's next?
The podcast team also discuss possible next steps, including:
- discussions at OECD/EU levels on possible changes to the OECD Pillar 2 global minimum tax rules to address US concerns;
- whether DSTs will proliferate or perish in view of the opposing pressures of the Pillar 1 proposals stalling versus the potential introduction of section 899; and
- whether proposed section 899 could itself be challenged as a discriminatory, extraterritorial and/or unfair tax that could be challenged under applicable trade laws.
If you would like to discuss any of the points raised in this blog post or the related podcast in further detail, please contact the podcast speakers or your usual Freshfields contact. For wider materials on Trump 2.0, see Trump 2.0: A US and global perspective.
Note: the podcast was recorded on 30 May 2025 and does not cover developments after this date.
