Congress Proposes a ‘Big Stick’ to Target Discriminatory Tax Measures

At the onset of its second term, the Trump Administration made clear that the United States opposed the current status of the design and implementation of the Global Anti-Base Erosion Model Rules, (“GloBE” or “Pillar 2”). Through the issuance of a Presidential Memorandum, the Administration stated that any prior commitments with respect to the Organization for Economic Cooperation and Development’s (“OECD”) global tax deal “have no force or effect within the United States.” The Administration directed the Secretary of the Treasury together with the United States Trade Representative to investigate any country that is not complying with tax treaties with the United States, or countries that adopt laws that, in the Administration’s view, impose extraterritorial taxes or disproportionately affect American companies, with the ultimate goal of implementing retaliatory or protective measures in response.

Against this backdrop, on January 21, 2025, House Ways and Means Committee Chair Jason Smith reintroduced a bill in the House of Representatives with the stated goal of protecting US businesses from “discriminatory and extraterritorial” taxes imposed by other countries.¹ The bill, titled Defending American Jobs and Investment Act (H.R. 591), sometimes referred to as the “countermeasure bill”, H.R. 591, is designed to counteract extraterritorial and discriminatory tax measures (as defined therein) imposed by other countries that adversely affect US persons and businesses. It establishes a framework for identifying such foreign tax practices, reporting them to Congress, engaging diplomatically with such countries, and imposing escalating remedial measures — including increased US tax rates and procurement restrictions — until the offending taxes are repealed.

Separately, but with the same intent, on March 27, 2025, Representative Ron Estes, joined by almost all of the other Republican members of the House Ways and Means Committee, reintroduced a bill in the House of Representatives that would amend the Internal Revenue Code (the “Code”) to change the way the base erosion and anti-abuse tax (“BEAT”) applies to certain non-US owned entities that are connected to jurisdictions that have implemented an extraterritorial tax. The bill, titled Unfair Tax Prevention Act (“H.R. 2423”), aims to prevent certain multinational groups from shifting profits out of the US tax base by imposing a higher BEAT rate and expanding the scope of payments that are subject to the BEAT.

The threat of retaliation through tax laws is not a new concept. The Code already contains two provisions that have been highlighted as designed to address unfair taxation of US individuals or entities, namely, sections² 891 and 896. Section 891, titled Doubling of rates of tax on citizens and corporations of certain foreign countries, was enacted in 1934. It empowers the President, by proclamation, to double the substantive tax liability (as compared to withholding rates)³ for “citizens and corporations” of a country that the President determines is subjecting US “citizens or corporations” to “discriminatory or extraterritorial” taxes. The administration has highlighted this provision as a possible means of addressing unfair taxation of US individuals or entities.⁴

Another provision enacted in 1966, section 896, titled Adjustment of tax on nationals, residents, and corporations of certain foreign countries, allows the President to impose higher US federal income taxes on citizens and corporations of another country, if the other country does not eliminate its more burdensome tax on US citizens or corporations after a request to do so and it is in the public interest.

Both provisions potentially conflict with later-in-time tax treaties. No president has ever invoked section 891 or 896.⁵

Background on Targeted Taxes

In December 2021, the OECD released model rules for implementation of Pillar Two (global minimum tax of 15% for certain multinational enterprises) under its Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) initiative. Adherence to Pillar Two is based on a “common approach” where jurisdictions may or may not adopt these rules; however, if adopted, such rules must be implemented consistently with the model. The Trump Administration and others in Congress believe that some rules included in the framework of the OECD’s initiatives, which includes an income inclusion rule (“IIR”) and an undertaxed profits rule (“UTPR”), are extraterritorial and potentially discriminatory as they could disproportionately affect US multinational companies (a common explanation for the disproportionate impact on US companies is that the US R&D credit reduces the US taxpayer’s effective tax rate (“ETR”) for purposes of the Pillar Two calculations, but R&D grant-style programs used in other jurisdictions do not reduce the foreign taxpayer’s ETR).

Digital services taxes (“DSTs”) are also an area of concern, and the Trump Administration considers such taxes discriminatory. DSTs are a unilateral measure implemented by a particular country with the goal of ensuring that the jurisdiction where the end user or consumer is located has increasing rights to tax the receipts of the multinational companies providing the goods and services (as opposed to ceding taxing rights to the jurisdiction of residence of the business or where assets are held). DSTs are generally levied on gross revenue generated from a wide range of digital services, such as the operation of online marketplaces, music and video streaming, online advertising, social networking services (such as dating apps), and the sale of data collected from users. Several countries have enacted DSTs, including Canada, the United Kingdom, France, Italy and India. The Trump Administration previously conducted a series of investigations on DSTs, and concluded that they did in fact discriminate against US companies.⁶

Defending American Jobs and Investment Act (H.R. 591)

H.R. 591 proposes to add a section 899 to the Code, which would include the following provisions:

1. Extraterritorial and Discriminatory Taxes

Under H.R. 591, an extraterritorial tax is any tax imposed by another country on a corporation, including any trade or business of such corporation, based on the income or profits of another person that is connected to such corporation through any chain of ownership, regardless of whether the income or profits are sourced in the other country, but other than by reason of direct or indirect ownership. For example, if a foreign country imposes a tax on a corporation based on the revenue of its US affiliate, that would be an extraterritorial tax.

A discriminatory tax is any tax imposed by another country that:

• applies to income that would not be considered sourced in such country (determined by applying US federal tax principles);
• is imposed on a base other than net income without allowing for cost recovery;
• is exclusively or predominantly applicable to nonresident individuals or foreign corporations or partnerships; or
• is not treated as an income tax under the other country’s laws or tax treaties.

For example, if a foreign country imposes a tax on the gross receipts of US digital service providers without regard to their expenses or location, that would be a discriminatory tax.

H.R. 591 adopts a broad definition of discriminatory tax. As currently designed, the legislation may find a measure discriminatory without any clear indication of intent to target US businesses. For example, a tax that happens to apply more to US companies due to the structure of a particular industry could be found to be discriminatory. However, although beyond the scope of this analysis, it is worth noting that, under World Trade Organization (“WTO”) rules, an explicit intent to discriminate is not necessary for a measure to violate a country’s WTO obligations. Further, per our prior Legal Update, at least some of the policies that the legislation intends to target may violate the terms of existing tax treaties.

Because the definition is complex and requires detailed factual analysis (e.g., whether a tax is ““predominantly applicable”“ to nonresidents, or whether it is ““not treated as an income tax”“ under foreign law), it places a significant administrative burden on the Treasury Department to investigate, interpret, and justify each determination. This could lead to inconsistent application across countries and, over time, may invite legal challenges from affected parties.

2. Reporting Requirements

H.R. 591 is not self-executing. To be effective, the Secretary of the Treasury must submit a report to Congress within 90 days of its enactment, listing each country that imposes extraterritorial or discriminatory taxes. The report must be updated every 180 days.

Each report must describe the tax, its rate, and the dates of enactment and effect. If a tax is repealed, the report must note the repeal and whether any other such taxes remain.

3. Diplomatic Engagement

The Secretary of the Treasury is required to engage bilaterally with each listed country to express US concerns, urge repeal of the offending taxes, and advise of potential US remedial actions.

4. Remedial Actions

Increased US Federal Tax Rates: For individuals and entities from listed countries, US federal income and withholding tax rates are increased by 5 percentage points in the first year, escalating by 5 percentage points increments each subsequent year, up to a maximum of 20 percentage points.

Procurement Restrictions: The President may prohibit federal procurement of goods or services from persons or entities of a listed country.

Tax Treaty and Trade Agreement Negotiation Considerations: The United States will take the existence of any extraterritorial or discriminatory taxes into account when negotiating or updating tax treaties and trade agreements, with required Congressional notification.

5. Effective Date of Remedial Action

Once a country is listed, a period of 180 days is allowed for negotiation for the potential removal of the extraterritorial or discriminatory taxes before the remedial actions begin. The effective date (“applicable date”) of the remedial action for any particular country is one day after the 180-day “negotiating period” ends.

Increases to the substantive tax rates are made for the taxable years beginning after the applicable date. On the other hand, increases to withholding rates apply to any payments or dispositions that occur after the applicable date.

There is a clear timing mismatch between the substantive tax liability that would be due under the remedial measures and the withholding rates, with the higher withholding rates coming into effect much earlier than the increased rates for the substantive tax liability. This would mean that withholding agents⁷ (e.g., US payors) would be required to begin applying the higher withholding rates to payments to applicable persons immediately after the applicable date, even though the recipient’s substantive US federal income tax liability may not become subject to the increased rates until the next taxable year. As a result, over-withholding would occur, which would create administrative complexity for both US payors and foreign recipients. Further, this timing mismatch could lead to cash flow issues and the need for refund claims, adding to the compliance burden and complexity of the proposed regime.

6. Termination of Remedies

If a country permanently repeals the offending tax, the increased tax rates and other remedies cease to apply beginning with the first tax year after the repeal.

7. Treaty Considerations

Generally, provisions of US domestic laws and US treaties carry the same weight and are interpreted in harmony to the greatest extent possible. However, in case of conflict between statutes and treaties courts usually rely on the “later-in-time” rule. Under this rule, if a provision of US domestic tax law and a provision of a US tax treaty are inconsistent, the one enacted or ratified most recently generally prevails. This means that if Congress passes a tax law after a treaty has been ratified, the new law can override the treaty to the extent of any conflict, and vice versa. Even though this rule ensures that the most current expression of US policy is given effect, it can create uncertainty for taxpayers relying on treaty protections that may be superseded by subsequent legislation.

H.R. 591 states that, for applicable persons from listed countries, increased US federal tax rates and withholding rates are to be applied regardless of any treaty obligation.⁸ As written, this provision effectively constitutes a direct override of existing US tax treaties with affected countries. This means that treaty benefits—such as reduced withholding rates on dividends, interest, and royalties—could be denied to residents of listed countries. For example, even if a treaty provides for a 5% withholding rate on dividends, assuming the remedial measures under H.R. 591 require an addition of 10 percentage points, the applicable tax rate on the dividend would be 40% (as the statutory rate is 30%) and not 15%.

One thing to note is that, as currently drafted, H.R. 591 does not appear to override exemptions from income or withholding taxes that are contained in the Code, such as exemptions from withholding taxes for foreign governments under section 892, exemptions from withholding and income taxes for qualified foreign pension plans under sections 897 and 1445, and the portfolio interest exemption under sections 871(h) and 881(c). As a result, such statutory provisions may become an increasingly important tax planning tool for non-US investors if H.R. 591 is enacted.

Unfair Tax Prevention Act (H.R. 2423)

In contrast to H.R. 591, H.R. 2423 is much narrower in scope, aiming to target only the base erosion and anti-abuse tax (“BEAT”). The proposed law would make it tougher for certain foreign-owned companies operating in the United States to minimize their US federal tax liability, by changing how much of their expenses are subject to special disallowance under the BEAT rules, and by removing some exceptions from the BEAT that might otherwise assist non-US groups reduce their US federal tax bill.

1. Overview of the BEAT

The BEAT is an add-on minimum tax that was enacted as part of the Tax Cuts and Jobs Act of 2017 (during the first Trump Administration) to discourage multinational corporations from eroding the US tax base by making deductible payments to related foreign parties. The BEAT applies to corporations (other than regulated investment companies, real estate investment trusts, and S corporations) that have average annual gross receipts of at least $500 million for the preceding three taxable years and that have a base erosion percentage of at least 3% (or 2% for certain banks and securities dealers). The base erosion percentage is the ratio of the corporation’s base erosion tax benefits (i.e., deductions for payments to related foreign parties and certain depreciation or amortization deductions) to its total deductions (excluding the net operating loss deduction and certain other deductions).

The BEAT is calculated by comparing the corporation’s regular US federal income tax liability (reduced by certain tax credits) to its modified taxable income (i.e., its taxable income increased by the amount of its base erosion tax benefits and the base erosion percentage of any net operating loss deduction for the taxable year). The BEAT is equal to the excess of 10% (or 5% for the 2018 taxable year, or 12.5% for taxable years beginning after 2025) of the corporation’s modified taxable income over its regular tax liability. The BEAT is payable in addition to the regular tax liability.

2. Extraterritorial Taxes under H.R. 2423

H.R. 2423 defines extraterritorial taxes as taxes imposed by foreign countries on corporations (or their trades or businesses) that are based on the income or profits of other persons (or their trades or businesses) that are connected to such corporations through any chain of ownership, regardless of the ownership interests of any individual, and other than by reason of the corporation having a direct or indirect ownership interest in such persons (the same definition as H.R. 591). For example, an extraterritorial tax could be imposed by a foreign country on a local corporation based on the income or profits of an affiliate of such corporation located in a different country.

The proposed language does not specify which countries have implemented extraterritorial taxes, but it could potentially include countries that have adopted or proposed DSTs or other measures that target the income or profits of certain multinational corporations such as the UTPR under Pillar 2.

3. Proposed Modifications to the BEAT

H.R. 2423 amends the current BEAT provisions to introduce a new category of taxpayers that are subject to the BEAT: “foreign-owned extraterritorial tax regime entities.” These are taxpayers that are controlled by a foreign entity (other than a foreign entity controlled by a US domestic corporation) if an extraterritorial tax is imposed on (i) any foreign entity that controls the taxpayer; (ii) any foreign entity that is controlled by the taxpayer or any foreign entity that controls the taxpayer; or (iii) any trade or business of any foreign entity described above. Under this definition, the regime could broadly apply to taxpayers in foreign-parented groups if any foreign entity within the group (e.g., a brother-sister entity to the US taxpayer) is subject to an extraterritorial tax, even if the parent entity’s jurisdiction does not itself impose such a tax.

For these taxpayers, the following changes to the BEAT would apply:

• They would be subject to the BEAT, regardless of their gross receipts or base erosion percentage;
• BEAT rate of 12.5% would apply, regardless of the taxable year, instead of the lower 10% BEAT rate that, under current law, applies to other taxpayers until 2026;
• Certain exceptions and adjustments that apply to other taxpayers would be disregarded, such as the services cost method exception, the qualified derivative payments exception, and the reduction of base erosion payments by the amount of income subject to US federal tax; and
• Importantly, 50% of the cost of goods sold would be treated as a base erosion tax benefit, effectively increasing the modified taxable income and the taxpayer’s BEAT liability (by comparison to the existing BEAT rules under which cost of goods sold are treated as a reduction to gross receipts, and not a deduction, such that they do not give rise to a base erosion tax benefit).

H.R. 2423 appears to be self-executing and would apply to taxable years beginning after the date of its enactment.

As noted above, in contrast to H.R. 591, H.R. 2423 is primarily an amendment to the Code with indirect international implications. In addition, it would apply automatically to all relevant entities after enactment (rather than requiring regular updates and reporting to Congress).

Conclusion

H.R. 591 is intended to clearly signal to other jurisdictions that the United States deems extraterritorial or discriminatory tax measures unacceptable, with the goal of pressuring foreign jurisdictions to repeal such taxes through a combination of increased US federal tax and withholding rates, procurement restrictions, and diplomatic engagement. The proposal is particularly relevant in the context of digital services taxes, undertaxed profits rules and other measures that, in the current administration’s view, are potentially extraterritorial or discriminatory.

If enacted, H.R. 2423 would significantly increase the tax burden and compliance costs for “foreign owned extraterritorial tax regime entities” that operate in the United States or have US subsidiaries or affiliates. The proposal would effectively penalize these entities for being subject to extraterritorial taxes in other jurisdictions, regardless of whether such taxes are consistent with international tax norms or principles. H.R. 2423 would also create a potential double taxation issue, as these entities would be taxed on the same income or profits by both the United States and foreign countries. Moreover, the bill would create a complex and uncertain definition of extraterritorial tax regime entities, as it would depend on the tax laws and practices of various foreign countries that may change over time.

Both bills are currently pending in the House Ways and Means Committee and the House Oversight and Government Reform Committee. Congressional Republicans have signaled an interest in including one or both of these bills in the forthcoming tax reconciliation package. However, in order to be included in the tax reconciliation package, a policy must have a direct impact on federal revenue or spending. Given that the increased taxes imposed under H.R. 591 are contingent upon certain discretionary actions by the Secretary of the Treasury, it is not immediately clear that H.R. 591 would meet the requirements to be included in the reconciliation legislation.

If you have any questions or concerns about these bills or their potential impact on your business, please contact us.

¹ In a press release, Smith stated that the “Defending American Jobs and Investment Act will ensure that President Donald Trump has every tool at his disposal to pushback against any foreign country that seeks to undermine America’s economic vitality or unfairly target our workers and businesses.”

² References to “section” refer to sections of the Code unless otherwise specified.

³ The tax rates subject to doubling are those imposed on individuals (sections 1 and 3), corporations (section 11), life and other insurance companies (sections 801 and 831), regulated investment companies and their shareholders (section 852), non-US resident individuals (section 871), and non-US resident corporations (section 881).

⁴ The White House, “America First Trade Policy”, section 2 (j) (Jan. 20, 2025).

⁵ Kuntz, Peroni & Bogdanski: US International Taxation (Thomson Reuters/WG&L, 2025, with updates through March 2025) (online version accessed on Checkpoint (April 21, 2025)); Danielle Rolfes, Casey Caldwell, Alistair Pepper, “Evaluating Possible US Retaliatory Tax Measures,” Tax Notes Today Int’l, April 15, 2025.

⁶ See, https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-digital-services-taxes

⁷ H.R. 591 explicitly addresses the withholding mechanics imposed on a withholding agent by reference to sections 1441(a) and 1442(a). Section 891, in contrast, increases the tax liability imposed on specified persons but does not affect the withholding rates for collecting such taxes.

⁸ This is another important distinction compared to section 891, which should not override existing US tax treaties, all of which came into effect after the enactment of this Code provision.