The spectre of the section 899 “revenge” or “foreign investor” tax was still looming over us when we recorded a podcast with Arvind Ravichandran, a tax partner at Cravath, Swaine & Moore LLP on 24 June 2025. It was a follow-up to our conversation with Arvind at the end of 2024, shortly after the U.S. election (and you can find both podcasts by searching “Slaughter and May Tax News” on your preferred podcast app). 

But how much can change within a week?! Based on an understanding among the G7 concerning the application of the global minimum tax under Pillar Two, Republicans in the U.S. Congress have removed section 899 the relevant U.S. tax legislation, from the One Big Beautiful Bill. 

What was section 899 about?

There had, in fact, been two different versions of section 899. Both would have increased U.S. taxes on payments to, and on the U.S. operations of, persons resident in countries that impose certain taxes which the Trump Administration considers unfair. But their scope and certain details differed. As Arvind explained in the podcast, the more recent, Senate Finance Committee version had tempered the earlier House version. For instance, under the Senate version, additional withholding taxes would have been suffered only by residents of countries that implemented the UTPR (not also by countries that imposed either a DST or DPT), the maximum additional rate was 15% and the text made clear that the U.S. domestic exemption for portfolio interest remained unaffected. But the Senate version would have still had a significant impact on businesses in the relevant countries. 

That said, already when we recorded the podcast, Arvind prognosticated that section 899 would be highly unlikely to apply by reason of a UTPR; that proved rather prescient.  

What’s the deal now?

Section 899 was removed from the One Big Beautiful Bill in light of an understanding reached by the G7 concerning the (dis)application of Pillar Two in respect of U.S. parented companies. The understanding was first announced by U.S. Treasury Secretary Scott Bessent on X on 26 June 2025; an official statement by the G7 followed on 28 June 2025. 

The G7’s official statement refers to a “side-by-side system” based on four accepted principles. These include an exemption from the UTPR and IIR of U.S. parented groups in respect of their foreign and domestic profits and a consideration of changes to the Pillar Two rules to “ensure greater alignment” between the treatment of substance-based non-refundable tax credits and refundable tax credits. 

The first of these principles (exemption from the UTPR and IIR of U.S. parented groups in respect of their foreign and domestic profits) would appear to mean that QDMTTs are unaffected. Countries may continue to impose QDMTTs on the operations of U.S. parented groups in their jurisdictions. It is possible that the deal could, however, nonetheless prompt a rethink of domestic strategies; one option could be to move away from taxes that have qualifying status for Pillar Two purposes in favour of something like Jersey’s MCIT with a credit system for CFC charges.

The first principle would further suggest that U.S. operations of non-U.S. parented groups would appear to remain within the scope of Pillar Two (whether as a result of the IIR or the UTPR). And in this respect, the “greater alignment” between the treatment of substance-based non-refundable tax credits and refundable tax credits may be important. This principle would appear to aim at addressing a concern that the current Pillar Two treatment of e.g. U.S. research and development tax credits could push effective tax rates on U.S. operations to below 15%, thus requiring a top-up. Removing the risk of such top-ups would benefit potentially exposed non-U.S. parented groups and (from a US perspective) ensure that Pillar Two does not undermine the effectiveness of domestic tax incentives. 

What are the next steps?

The understanding must now be discussed and further developed by the Inclusive Framework which comprises over 145 countries and jurisdictions. The timeframe for this is unclear, and the process could be prolonged. There may be resistance from other countries – including India and China – who were not party to the G7 understanding. With what is effectively an exemption from Pillar Two for the U.S., questions may be asked about the stability of Pillar Two over the longer term and why other countries’ tax system should not be given similar treatment. 

On the other hand, there will be some pressure to reach agreement in a timely manner. Congress Republicans stated that they “stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation” – although it is not entirely clear what such immediate action would look like. One possibility might be another attempt at legislating section 899, but it is unclear how this could be achieved. As Democrats are unlikely to vote for it, the only way that it could pass the Senate would be through Budget Reconciliation, but there is a limit on the number of Bills that can be passed by Budget Reconciliation, and there had always been the risk that section 899 might fall foul of the Byrd Rule which broadly provides that Budget Reconciliation can’t be used to enact other non-budgetary policy priories  (and the real aim of section 899 seemed not to be raising revenue, but to encourage that other “countries withdraw these taxes and decide to behave”).

Arvind touched on the Budget Reconciliation process in our most recent conversation; but he explained it (and the Byrd Rule) in more detail in the December 2024 edition. 

How could the Inclusive Framework implement the deal?

It is as yet unclear how the side-by-side system would technically be achieved. The best option would seem the creation of a safe harbour – one question here would be whether it refers specifically to the U.S. or U.S. parented groups or whether it would be based on features of the U.S. system that justify the side-by-side approach (such that, at least theoretically, other countries could also benefit from this safe harbour). 

Practically, we would expect any technical solution to be set out in additional Administrative Guidance that is then incorporated into the Commentary on the Model Rules; a change to the Model Rules themselves is highly unlikely. 

From an EU perspective, there will be an additional challenge, if the technical solution were to require amendment of the Pillar Two Directive which would likely be challenging (if not impossible). In contrast, an additional safe harbour could be implemented through the mechanics of the Directive as Article 32 provides for the implementation of “qualifying international agreement[s] on safe harbours”. The one slight wrinkle here is that such agreements are defined by reference to the consent of all Member States and one of them (Cyprus) is not part of the Inclusive Framework. So, agreement by the Inclusive Framework on a safe harbour is not, by itself, sufficient for the purposes of Article 32. On previous occasions, this was resolved through a declaration by Cyprus that they also agreed, and we would expect the same to happen here (if the G7 deal was implemented through a safe harbour). 

And what about Digital Services Taxes?

DSTs were not mentioned in the G7 statement, so it remains to be seen what happens in respect of these. 

The Trump Administration has tools (other than the proposed section 899) that it could use to address DSTs. It would be possible to renew investigations by the U.S. Trade Representative under section 301 of the Trade Act which had previously recommended the imposition of additional tariffs in response to certain DSTs. Another option could be to look at invoking section 891 of the Internal Revenue Code to double certain U.S. tax rates. Both of these options were mooted in a Presidential memorandum of 21 February 2025 that had requested that certain related information be included in a report that was due at the start of April. We understand that this report has been delivered, but not made public, so it is unclear what it may (or may not) have recommended.  

Perhaps a more likely scenario might be that DSTs are eventually addressed bilaterally in the context of ongoing trade negotiations. Whilst we have not seen this so far in the context of the UK/US trade deal, Canada announced on 29 June 2025 that the collection of their DST would be halted and that legislation would soon be brough forward to rescind the Digital Services Tax Act.  

A final option is that DSTs could be removed as a result of other domestic processes within the relevant countries – earlier today, our colleagues at Bredin Prat wrote about a constitutional challenge to the French DST.