Table of Contents
- US Tax Code Changes: Navigating the Impact of Section 899 on Global Businesses
- Understanding the Policy Behind Section 899
- Key components of Section 899
- Operational Challenges and Compliance Hurdles
- potential Changes and the Likelihood of Passage
- Key Considerations for Businesses
- Evergreen Insights: The Evolving Landscape of International Tax
- Frequently Asked Questions About Section 899
Tax professionals anticipate that Section 899, a proposed addition to the US Tax Code within the One Big Lovely Bill Act (OBBBA), could pose significant compliance challenges for multinational companies. This provision, designed to counter what the US deems “unfair foreign taxes,” is currently under scrutiny during Senate negotiations and may undergo revisions before enactment.
Understanding the Policy Behind Section 899
The OBBBA’s Section 899 stems from republican opposition to the Organization for Economic Cooperation and Development’s (OECD) two-pillar global tax model, which is being implemented by over 140 jurisdictions outside the US.The US, under the previous administration, has largely remained a holdout against the OECD’s approach to international tax rules. The core concern is that US multinational enterprises (MNEs) could face economic disadvantages, such as double taxation, under the OECD framework.
A key objective of the OBBBA is to bolster the international tax regime established during the Trump administration through the Tax Cuts and Jobs Act (TCJA). Provisions like global intangible low-tax income (GILTI), base erosion and profit-shifting (BEAT), and foreign-derived intangible income (FDII) have been viewed by some conservative lawmakers as conflicting with the OECD’s Pillar Two, which sets a 15% global minimum tax. According to the Congressional Budget Office,the TCJA reduced federal revenues by about $1.5 trillion over the 2018-2027 period, underscoring the significant fiscal impact of these tax policies Congressional Budget Office.
Key components of Section 899
Section 899 introduces a tax surcharge on non-residents connected to countries that impose laws considered detrimental to US taxpayers. These include digital service taxes, the Pillar two undertaxed profits rule (UTPR), and other taxes deemed “discriminatory” or “extraterritorial.” The provision would increase certain tax rates for an “applicable person” after these “unfair” taxes take effect.
Did You No? Section 899 has been described as a “revenge tax” due to its retaliatory nature against countries perceived to be unfairly taxing US interests.
While the statute is designed to be “self-executing” by referencing specific tax types that trigger the surcharge,the treasury Department will likely need to provide further guidance to clarify any ambiguities. the definition of “applicable person” is central to the provision.as Deloitte’s Harrison Cohen explained, an entity is considered an “applicable person” if it is a resident of, or somehow associated with, a discriminatory foreign country, which is defined as a country with an unfair foreign tax.
for US or foreign companies subject to the BEAT, Section 899 introduces stricter rules if the company is not publicly held and more than 50% of its stock is owned by applicable persons.Moreover, Section 899 overrides tax treaty protections, meaning that an applicable person connected with a foreign country with which the US has a tax treaty would not benefit from the agreement and would pay the higher statutory rate.
Pro Tip: due to the multiple new definitions involving the word “applicable,” carefully parsing the language is crucial to determine which entities or tax types fall within the scope of Section 899.
Operational Challenges and Compliance Hurdles
The “operational impacts” of Section 899 are expected to be broad, affecting an account holder’s entire life cycle, from onboarding to determining their tax profile, monitoring in-scope discriminatory foreign countries, and applying the correct withholding rates and reporting procedures. Identifying an applicable foreign person raises questions about residency, including whether it encompasses tax residency, which can be multiple for a single entity.
Existing forms like Form W-8 do not currently track all the necessary information, such as details regarding non-public corporations majority-owned by applicable persons or trusts with the majority of beneficial interests held by applicable persons. Updates to Form W-8 or similar forms are likely, which would impact a company’s due diligence procedures and onboarding processes. Companies may need to collect and categorize additional data on their account holders, including residency information for limited partnerships.
The Treasury Department’s forthcoming list of discriminatory foreign countries adds another layer of complexity. The frequency of updates and the criteria for inclusion on the list remain uncertain. Companies will need robust controls to monitor and track the list and create real-time, systemic solutions to adjust withholding in alignment with changes. Tracking the effective dates of in-scope taxes will also require changes to transactional platforms.
Systems will need to be nimble and scalable to account for these moving targets,and also withholding information of entities that were previously exempt. Examples include pension funds, sovereign wealth funds, and private foundations.
potential Changes and the Likelihood of Passage
While initial skepticism existed regarding the enactment of Section 899, recent feedback from senators suggests that the proposal is highly likely to remain in the OBBBA in some form. Though, affected companies and industry groups are actively communicating their concerns to senators about the potential impacts of Section 899.
The Investment Company Institute (ICI) has stated that Section 899 could limit foreign investment in the US,a key driver of growth in American capital markets. The ICI has requested that the Senate revise the provision to be more narrowly targeted.One potential change under consideration is a delayed effective date,which would provide companies with more time to prepare for the new requirements.
PwC Principal Nita Asher has suggested that delaying the effective date may be necessary not only for negotiations but also for establishing procedures to facilitate the enactment and application of any retained rules. Companies are already modeling the potential impact of Section 899 on their tax structures and preparing talking points to share with tax authorities to avoid being associated with any unfair taxes.
Key Considerations for Businesses
Businesses need to proactively assess the potential impact of section 899 on their operations and tax liabilities. This includes:
- Reviewing existing tax structures and identifying potential exposures.
- Monitoring the Treasury Department’s list of discriminatory foreign countries.
- Preparing for potential changes to withholding procedures and reporting requirements.
- Engaging with tax advisors to develop strategies for mitigating the impact of Section 899.
| Area of Impact | Potential Challenge | mitigation Strategy |
|---|---|---|
| Residency Determination | Defining and tracking tax residency for applicable persons. | Enhance data collection and due diligence procedures. |
| Compliance Monitoring | Tracking changes to the Treasury’s list of discriminatory countries. | Implement real-time monitoring systems. |
| Withholding Adjustments | Adapting transactional platforms to align with new withholding rules. | Ensure systems are nimble and scalable. |
Evergreen Insights: The Evolving Landscape of International Tax
The global tax landscape is constantly evolving, driven by factors such as increasing digitalization, cross-border investment, and international cooperation. Initiatives like the OECD’s two-pillar solution reflect a growing consensus among countries to address tax challenges posed by the modern economy. Though, differing national interests and policy priorities can lead to disagreements and unilateral measures, such as Section 899. Understanding these trends and their potential implications is crucial for businesses operating in the global arena.
The US approach to international tax policy has historically been shaped by a desire to protect its economic interests and ensure that US companies are not unfairly disadvantaged.Though, the rise of digital services and the increasing mobility of capital have made it more difficult to achieve these goals through conventional tax rules. As a result, policymakers are exploring new approaches, such as Section 899, to address these challenges. The ongoing debate over international tax reform is likely to continue for years to come, with significant implications for businesses and governments worldwide.
Frequently Asked Questions About Section 899
- What is the effective date of Section 899?
- The effective date depends on when the Treasury list of discriminatory foreign countries is published, but a delayed effective date is under consideration.
- How can companies prepare for Section 899?
- companies should review their tax structures, monitor the Treasury list, and engage with tax advisors.
- Does Section 899 apply to all foreign taxes?
- No, it only applies to taxes deemed “unfair” by the US, such as digital service taxes and the UTPR.
- Will Section 899 impact small businesses?
- The impact will primarily be on larger multinational enterprises, but smaller businesses with international operations may also be affected.
- Where can I find the Treasury Department’s list of discriminatory foreign countries?
- The location of the list is currently unknown,but it will likely be published on the Treasury Department’s website.
Disclaimer: This article provides general information and should not be construed as tax or legal advice. Consult with a qualified professional for personalized guidance.
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