Section 899, a retaliatory tax proposed by the United States in 2025, became a rare example of domestic tax policy being used successfully as a geoeconomic threat. It helped secure an agreement shielding US-parented companies from two major enforcement provisions of the global minimum tax, after which Congress removed the proposal. Its success, however, does not establish that access to a large economy can reliably force other governments to change course.
The global tax dispute
In October 2021, more than 130 jurisdictions agreed to an outline for the OECD’s Two-Pillar international tax project:
- Pillar One would reallocate taxing rights toward countries where customers reside, affecting roughly $200 billion in corporate profits.
- Pillar Two establishes a 15 percent global minimum tax and was estimated to raise approximately $220 billion in additional global tax revenue.
Pillar One has stalled. A draft multilateral treaty appeared in October 2023, but the June 2024 deadline for a final agreement passed without completion. Agreements temporarily managing disputes over national digital services taxes also expired. Canada planned to implement its own digital services tax but reversed course in June 2025 during broader negotiations with the United States.
Pillar Two began taking effect among early adopters in 2024. More than 65 countries had adopted legislation or introduced draft legislation by the time of the analysis. Its rules generally apply to multinational groups with annual revenue exceeding €750 million.
The system contains three principal mechanisms:
- A qualified domestic minimum top-up tax (QDMTT) raises the effective tax on domestic income to 15 percent before another country can collect the difference.
- An income inclusion rule (IIR) allows the parent company’s jurisdiction to impose a top-up tax on low-taxed foreign income, calculated country by country.
- An undertaxed profits rule (UTPR) allows a country to increase taxes on a multinational group when part of that group pays less than 15 percent elsewhere—even when neither the parent company nor the relevant profits are located in the country applying the UTPR.
The UTPR was especially controversial in Washington because it could permit foreign governments to tax US companies based on income and tax rates in the United States, despite Congress not incorporating the OECD rules into US law.
The United States already applies several anti-avoidance and minimum-tax rules, including net CFC-tested income, the corporate alternative minimum tax and Subpart F. It also has the base erosion and anti-abuse tax, or BEAT, introduced in the 2017 Tax Cuts and Jobs Act. BEAT applies to certain large multinational corporations and is intended to discourage deductible payments that shift profits out of the United States. Its rate rose to 10.5 percent in 2026.
How Section 899 developed
The United States joined the Two-Pillar agreement in 2021, but the Biden administration did not obtain the congressional changes needed to align US law with Pillar Two before Democrats lost control of the House in the 2022 midterm elections. This left American companies and the US tax base exposed to foreign application of the new rules.
In May 2023, House Ways and Means Committee Chair Jason Smith introduced legislation directing the Treasury Department to identify countries imposing discriminatory or extraterritorial taxes. US withholding and income-tax rates on people and businesses connected to a listed country would rise by five percentage points annually, beginning 180 days after the country was named, up to a 20-point increase.
Representative Ron Estes introduced a separate proposal in July 2023 that would strengthen BEAT against entities associated with countries using extraterritorial tax regimes. The concept became known as “Super BEAT.”
After returning to office in January 2025, President Donald Trump issued a memorandum declaring that the OECD global tax deal had no force or effect in the United States. He instructed the Treasury Department to investigate discriminatory foreign taxes and develop protective measures. A separate trade memorandum referred to Section 891, a retaliatory tax provision dating from 1934.
Smith then reintroduced the Defending American Jobs and Investment Act. In May 2025, retaliatory tax provisions combining elements of the Smith and Estes proposals were included in the House version of the One Big Beautiful Bill Act.
What the proposal would have done
Section 899 would have increased US withholding and income taxes on specified people, corporations and partnerships connected to countries imposing a digital services tax, UTPR, diverted-profits tax or another measure judged discriminatory or extraterritorial.
The House and Senate versions differed materially:
| Provision | House proposal | Senate proposal |
|---|---|---|
| Annual tax-rate increase | 5 percentage points | 5 percentage points |
| Maximum increase | 20 percentage points above statutory rates | 15 percentage points above treaty rates |
| Earliest effective date | January 2026 | January 2027 |
| Portfolio interest | No specific broad carve-out described | Portfolio and related interest excluded |
| Super BEAT rate | 12.5 percent | 14 percent |
| $500 million receipts threshold | Eliminated | Eliminated |
| Base-erosion threshold | Eliminated | Reduced from 3 percent to 0.5 percent |
| High-tax related-party exception | Unavailable | Unavailable under Super BEAT |
The House proposal would also have removed several ordinary BEAT exceptions, including those involving cost of goods sold, the services cost method and payments already subject to full US withholding tax.
The Senate separately proposed modifying standard BEAT by reducing its base-erosion threshold from 3 percent to 2 percent and adding an exception for related parties taxed at no less than 90 percent of the US rate—approximately 18.9 percent. That exception would not have applied under Super BEAT.
Section 899 was ultimately removed and never became law.
The agreement that ended the threat
While Congress considered Section 899, the US Treasury negotiated with other G7 governments for recognition of the American minimum-tax system.
Treasury Secretary Scott Bessent warned that the United States would adopt Section 899 unless an agreement excluded US-parented groups from Pillar Two’s IIR and UTPR. On June 28, 2025, the G7 announced a “side-by-side” arrangement under which US-parented groups would be exempt from those two rules if Congress removed Section 899.
Congress did so, and the One Big Beautiful Bill Act was signed on July 4, 2025, without the retaliatory tax.
US groups remained subject to QDMTTs in countries where they operated. The UTPR also remained available against non-US groups. The OECD/G20 Inclusive Framework later accepted the side-by-side system, with the United States becoming the only jurisdiction then recognized as meeting its qualification requirements.
Why the threat succeeded
Several overlapping explanations may account for the outcome.
Access to US capital was valuable leverage
Section 899 threatened returns earned through the US financial market. Foreign companies and investors facing higher taxes had an incentive to press their governments to accept the side-by-side arrangement.
The threat was also credible because it had entered active legislation, and it contained a clear off-ramp: if other governments changed their policy, Congress could remove the provision. Accepting the US demand therefore appeared less costly than allowing Section 899 to take effect.
This reflects the concept of “weaponized interdependence.” A country controlling an important network or chokepoint can possess coercive power that is not derived solely from the overall size of its economy. Compliance becomes likely when accepting a demand offers the target a better outcome than refusing it.
The fact that the targets were US allies also mattered. Research on the “sanctions paradox” suggests allies expecting continued cooperation may compromise more readily than adversaries, even though governments are often more eager to impose sanctions on adversaries.
The compromise restored an earlier negotiating position
The 2020 OECD Pillar Two blueprint had contemplated treating the existing US tax system as equivalent to the emerging global regime. Other governments therefore understood that exempting the US system was a plausible fallback rather than an entirely new demand.
Republican lawmakers had also warned for several years that a future Republican administration would seek to return to that earlier approach. The eventual arrangement could consequently be understood as a technical contingency that negotiating governments already expected might become necessary.
The EU preserved the parts it valued most
The European Union retained QDMTTs on US companies and preserved the UTPR against non-US groups. Those provisions continued to support the EU’s effort to enforce the global minimum tax and influence international tax competition.
Accepting a US exemption may therefore have been preferable to risking Section 899 and the broader collapse of Pillar Two. From this perspective, the United States initially faced an excessive demand and the final outcome represented a compromise both sides could tolerate.
Why the model may not be easily repeated
Section 899 combined several unusually favorable conditions:
- The counterparties were allies rather than adversaries.
- The dispute concerned an existing international negotiation.
- The US demand was specific and manageable.
- Earlier OECD work provided an obvious fallback position.
- Foreign firms and investors had strong incentives to lobby their own governments.
- The legislative process made the threat credible.
- Removing the proposal provided a clear reward for compliance.
- The cost of US inaction included possible double taxation and foreign taxation of US corporate earnings.
Tariffs and digital services taxes often lack these features. They are generally unilateral measures used to renegotiate established rules through public pressure. European governments have argued that their digital services taxes will disappear once an international agreement reallocates taxing rights, but Pillar One remains unsigned. US tariffs intended to reorganize supply chains or reshape the World Trade Organization similarly lack an agreed fallback solution.
A large market creates bargaining power, but size alone does not make that market an unavoidable global chokepoint.
Lessons from European measures
The European Union has also tried to influence foreign policy through market access, with mixed results.
The Carbon Border Adjustment Mechanism requires payments on certain imported products when the exporting jurisdiction lacks a carbon price equivalent to the EU Emissions Trading System. The EU itself determines equivalence, giving it negotiating leverage over exporters seeking equal access to its market.
However, the United States, China and India had not adopted carbon prices aligned with the EU system. China and India criticized the measure publicly and through the World Trade Organization, while BRICS members called it unilateral, punitive, discriminatory and protectionist. Russia was the only country identified as having formally filed a WTO complaint. The record remained insufficient to show that market pressure would cause the largest economies to adopt the EU model.
The EU’s implementation of Pillar Two follows similar logic. More than 65 jurisdictions adopted at least part of the system, but China and India did not. With the United States operating under its side-by-side arrangement, the EU retained the strongest interest in enforcing Pillar Two through the UTPR.
The EU also maintains a list of non-cooperative tax jurisdictions. Listed jurisdictions may face withholding taxes, non-deductibility of certain payments, stricter controlled-foreign-company rules or exclusion from EU funding.
A World Bank analysis found that selection for EU review increased the likelihood of a jurisdiction joining the OECD/G20 Inclusive Framework. It found no evidence, however, that blacklisting reduced offshore wealth or shifted profits, partly because many jurisdictions hosting those assets and profits were not targeted.
These cases suggest that restricting access to a major market may bring governments into negotiations without necessarily producing compliance. Poor targeting, limited enforcement and unfavorable domestic politics can prevent economic leverage from becoming a political result.
Economic risks of retaliatory taxation
Had Section 899 taken effect, it would have affected investment from countries representing more than 80 percent of the US inbound foreign direct investment stock.
Higher taxes could have encouraged foreign investors to move capital elsewhere, placing additional pressure on US investment, economic growth and bond markets. Because demand for US assets supports the dollar’s reserve-currency role and the federal government’s ability to finance debt, even modest efforts to reduce dependence on dollar-based infrastructure could create substantial long-term costs.
Repeatedly weaponizing access to the US financial system could also encourage allies and competitors to develop alternatives. Overuse of a chokepoint can gradually make that chokepoint less effective.
Questions for future policy
Before proposing another Section 899-style measure, policymakers would need to determine:
- Whether domestic taxation creates coercive dynamics meaningfully different from tariffs or sanctions.
- Whether affected foreign companies have enough political influence to change their governments’ positions.
- Whether the measure could work against an adversary rather than cooperative allies.
- Whether the underlying international system can realistically be reshaped without broad consensus.
- Whether the target has a politically acceptable route to compromise.
- Whether the threat is credible and can be withdrawn promptly after compliance.
- How the policy would affect inbound investment, growth, Treasury markets and the dollar.
- Whether using the measure would damage long-term alliances or encourage alternatives to US financial infrastructure.
- Whether the economic and sovereignty costs of taking no action exceed the risks created by retaliation.
Section 899 succeeded because it applied focused pressure to allies during an existing negotiation, pursued a limited objective and offered a clear way to remove the threat. Its outcome does not support a general assumption that other countries will comply whenever the United States threatens access to its economy. Future tax, tariff or market-access measures would require equally careful assessment of the target’s dependencies, alternatives, domestic politics and willingness to negotiate.
Source article: taxfoundation.org
