Is a New U.S. Tax Weapon on the Horizon? What You Need to Know About the “Unfair Foreign Tax” Proposal
A new U.S. tax proposal is making waves in international business circles—and for good reason. Tucked into the high-profile “One Big, Beautiful Bill” is a provision targeting what some U.S. lawmakers consider “unfair” foreign tax regimes. At the heart of this proposal is a direct challenge to a key piece of the Organization for Economic Co-operation and Development’s (OECD’s) global minimum tax framework, and the ripple effects could impact multinational companies, trade negotiations, and compliance strategy alike.
Background: What’s the Global Minimum Tax?
Over the past few years, nearly 140 countries have signed on to the OECD’s two-pillar global tax framework. Pillar Two, the more widely adopted element, establishes a 15% minimum tax rate on multinational enterprises (MNEs) in each country where they operate. This is enforced through a layered system that includes the Undertaxed Profits Rule (UTPR), Income Inclusion Rule (IIR), and Qualifying Domestic Minimum Top-Up Tax (QDMTT).
Under former President Biden, the Treasury Department worked to conform the tax code to Pillar Two, rather than signing onto the OECD Pillars which included guidance on how global minimum tax interacts with GILTI. GILTI (global low-taxed income) along with FDII (foreign-derived intangible income) and BEAT (base erosion anti-abuse tax) are deductions that were introduced by The Tax Cuts and Jobs Act and overhauled the U.S. international tax laws in 2017. Some U.S. MNEs could see an increase in the effective annual tax rate (EATR) of 6.5% because the “use of new foreign tax credits” against “residual GILTI liability” will not be allowed.
What Is the U.S. Proposing?
In response, the new proposal would introduce Section 899 to the Internal Revenue Code. This would penalize countries that implement the UTPR or other “discriminatory” tax policies—potentially raising the U.S. federal income tax rate on affected transactions by five percentage points annually, compounding each year.
This tax wouldn’t just hit foreign governments—it could affect U.S. companies doing business with foreign entities such as sovereign wealth funds, public pension plans, and state-owned enterprises. Taxpayers would need to track the ownership of counterparties and provide documentation proving exemptions, creating a significant administrative burden.
Why It Matters Now
This proposal is not just about tax—it’s about trade. By targeting countries that adopt the UTPR, the U.S. could use Section 899 as a negotiating tool in tariff discussions. The goal? To push foreign governments to ease off on new international taxes—or even reduce tariffs—in order to avoid being penalized under this new U.S. regime.
There’s already speculation that this pressure could force the OECD and European Union to reconsider their treatment of U.S. tax provisions like GILTI and potentially recognize them as compliant with the global framework. Another possible outcome would be a permanent adoption of the current safe harbor or exemption for U.S. companies under Pillar Two.
What Should Businesses Do?
If you operate internationally—or even if your counterparties do—you need to be watching this proposal closely. The ripple effects could reshape how and where your business is taxed, and how you structure cross-border transactions. A proactive review of entity structures, ownership details, and tax treaty positions could help avoid future headaches.
As the legislative debate unfolds, the CSH international tax team is tracking developments and helping clients assess the potential impact. If you’re wondering how this might affect your business, now is the time to start asking questions. Connect with us today to learn more.
Written by: Lisa Wineland & Haley Griffith-Baughman
