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.  

Contributors

Antony Cheung

Jarrod Newell 

The post Updates on the Big Beautiful Section 899 & Pillar Two  appeared first on SW Accountants & Advisors.

As part of the One Big Beautiful Bill Act (the Bill) passed by the U.S. House of Representatives, section 899 Enforcement of Remedies Against Unfair Foreign Taxes will be introduced to the Internal Revenue Code and expected to affect Australian entities from 1 January 2026. This is implemented as a retaliatory tax against foreign countries that the U.S. deems to have ‘unfair foreign taxes’ imposed on U.S. multinationals and individuals operating overseas. The Bill will now go to the U.S. Senate, where passage is likely but not assured.

As Australia will satisfy the definition of a discriminatory foreign country (DFC) this tax will adversely impact all Australians who invest or do business in the U.S. Australian taxpayers will have an additional 5% of tax levied upon their U.S. source income and certain capital gains in the first year and increasing by 5% annually. The section intends to override the reduced treaty rates under the U.S. – Australia Double Tax Agreement (DTA), but the agreed rate is used as the baseline for subsequent increases and capped at 20% above the statutory rate.

Background

On 20 January 2025, President Trump signed an executive order declaring that the OECD global tax deal does not apply to the U.S. A memorandum followed, warning that the U.S. would retaliate against any foreign country imposing unfair or extraterritorial taxes on U.S. citizens or companies.

Under the proposed section 899, a DFC is a country that has any of the following in force:

• Digital service tax (DST),
• undertaxed profits rule (UTPR) under the Pillar Two GloBE rules,
• diverted Profits Tax (DPT), or
• extraterritorial/discriminatory taxes that the U.S. Treasury deems to be borne disproportionately by U.S persons.  

Whilst the Treasury Secretary must issue quarterly reports listing DFCs, Australia is on the ‘blacklist’, considering the ‘bad’ taxes DPT and DST have been in force since 2018 and the UTPR commenced on 1 January 2025.  

Who is affected

The proposed Section 899 levies an additional tax on ‘applicable persons’, defined as any of the following entities:

• Governments of a DFC,
• individuals (other than a U.S. citizens/resident) who are tax residents of a DFC,
• foreign corporations that are tax residents of a DFC, other than U.S.-owned corporations,
• private foundations created or organised in a DFC, broadly not-for-profits,
• any foreign corporation, other than a publicly held corporation, that is more than 50 percent owned (by vote or value) directly or indirectly after applying certain attribution rules by other applicable persons,
• any trust (including a complying superannuation fund) for which the majority of beneficial interests are held by applicable persons (above); and
• foreign partnerships, branches, and any other entity identified by the Treasury Secretary concerning a discriminatory foreign country.

How Section 899 tax applies

Section 899 provides for increased rates of tax with the five categories:

• Effectively connected income (i.e. business income) – currently 21%,
• US source non-effectively connected income (i.e. investment income) – currently 30%,
• branch profits tax – currently 30%,
• gain on disposal of U.S. real property – currently 15%, and
• income received from foreign private foundations – currently 4%.

The tax rate would be a 5% increase in the first year and would increase by 5% each year after.

By way of examples:

• Under the US – Australia DTA, withholding tax (WHT) on a ‘portfolio interest’ (i.e. <10% interest) dividend is 15%. The initial tax liability under section 899 would increase the WHT from 15% to 20% instead of 30% to 35%. The potential liability is capped at 50% (being statutory rate of 30% + cap of 20%).
• The tax rate applicable to the business income of a foreign company is potentially 41% (corporate tax rate of 21% + cap of 20%)

When would it apply

If the Bill passes U.S. Senate, section 899 would apply to Australian entities from income years commencing 90 days after the date of enactment. Given the U.S. has a 31 December year end it is expected that this would commence from 1 January 2026.

Should we be concerned

The constant changes in U.S. fiscal and economic policies mean that we are living in a world of uncertainties and financial pain. Whether you are a multinational or an individual with superannuation savings, you will be adversely impacted by this proposed tax.

Australian entities should evaluate the impact of the proposed tax if they

• invest in U.S. assets,
• have subsidiaries or branch in the U.S.,
• derive dividend, interest, royalties or other income sourced from the U.S.,
• derive salaries (or similar income) that are taxed in the U.S.,
• have made tax equalisation payments in relation to expatriates working in the U.S.

How SW can help

SW will continue to monitor and keep you informed on a timely basis on further developments in this space.

We encourage you to discuss with your SW contact or the specialist tax contacts listed in this alert on how the proposed tax may impact you.

Contributors

Antony Cheung

The post Section 899: Not a Big Beautiful Tax appeared first on SW Accountants & Advisors.