Updates on the Big Beautiful Section 899 & Pillar Two
02/07/2025
Never a dull moment in US politics and tax policies – the proposed section 899 has come and gone in a matter of weeks. What are the ramifications for Pillar Two?
Just few weeks after the US Congress passed the One Big Beautiful Bill Act (the OBBBA), including the controversial Section 899 ‘revenge tax’, the Senate has implemented a number of changes to the OBBBA. The revised version of the OBBBA excludes this revenge tax. This change comes after a recommendation from US Treasury Secretary Scott Bessett to remove the tax as part of a deal with the G7 nations (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States). This removal follows widespread concern that the tax was expected to reduce foreign investment into the US costing US jobs.
This version of the OBBBA narrowly passed in the US Senate on 1 July 2025 with Vice President Vance casting the tie breaking vote. Now the OBBBA needs to be reconsidered by Congress prior to the 4 July deadline self-imposed by President Trump.
Arising from the deal with the G7 nations is the newly proposed ‘side-by-side’ solution, whereby US-parented multinational groups would be exempt from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) under the Organisation for Economic Cooperation and Development’s (OECD) Pillar Two. This is on the basis that the US has its own domestic minimum tax rules.
The removal of proposed Section 899 is great news for Australian entities with investments and/or business interests in the US. This is because there will not be an increase of 5% per annum, for up to an additional 15% beyond the existing reduced treaty rate. Furthermore, no change to the minimum tax of 10% imposed on large corporations per the base erosion and anti-abuse tax (BEAT) regime.
Considering the US parent group exemption is struck between the US and G7 nations (which does not include Australia), the impact on Australia’s implementation of Pillar Two is currently unclear. This is a live issue for multinationals, given the IIR and DMT, and UTPR apply to income years starting 1 January 2024 and 2025, respectively.
G7 statement on global minimum taxes
Following the signing of executive order in January this year by President Trump to ‘defend US tax sovereignty’ and outlining concerns regarding the Pillar Two rules agreed by the OECD/G20 Inclusive Framework (representing over 140 countries), the US and G7 nations came to a joint understanding in their recent summit addressing global minimum tax and tackling tax planning and avoidance. The ‘side-by-side’ arrangement is based on the following principles:
- Multinationals with a US parent will be fully exempted from the application of UTPR and IIR (i.e. 15% minimum corporate tax) with regard to domestic and foreign profits
- commitment to identifying substantial risks, including base erosion and level-playing concerns
- simplifying Pillar Two administration and compliance framework
- considering changes to Pillar Two treatment of substance-based non-refundable tax credits aligning with treatment of refundable tax credits.
In return for the US parented group exemption, the proposed section 899 ‘revenge tax’ has been removed from the Senate bill, which was passed overnight.
What this means to Australia (and Pillar Two)
The removal of section 899 will be welcomed by Australian groups that invest and conduct business in the US. This is particularly relevant for superannuation funds taxed at 15% in Australia, where the additional US tax could not be credited and would have directly and immediately impacted investment returns.
This G7 announcement also represents a landmark change to the international tax environment as Pillar Two was developed due to global concerns over the digital economy and base erosion, which worsened in the past two decades.
Noting the Australian domestic minimum tax and IIR, and UTPR affect income years commencing 1 January 2024 and 2025, many practical issues remain unsolved:
- As this is a G7 agreement, would it be approved under the broader OECD inclusive framework, representing more than 140 countries?
- How would the US entity exclusion play out at the global and Australian domestic level, and will there be roll-back of the legislation, given the intention of these laws is predominantly to target US multinationals?
- What is the adverse impact on Australian multinationals since the exclusion provides a structural tax advantage to US multinationals?
- Would there be any side deals between Australia and other jurisdictions?
- How would the Commissioner (and the ATO) administer the law in the interim while negotiations take place, given a full year has passed since the legislation came into effect?
How SW can help
The ever-evolving nature of US and global tax policies require continued vigilance from Australian entities and their advisors.
SW will monitor and keep you informed as developments happen.
Reach out to your SW contact or our specialist tax contacts listed in this alert for advice.
