US uses tax rules as leverage
- In June 2025, the Trump administration pushed Congress to add Section 899, a retaliatory tax that would raise U.S. taxes on investors and companies from countries Washington said used “unfair” foreign taxes. - The proposal targeted digital services taxes and parts of the Organisation for Economic Co-operation and Development’s Pillar Two regime, with Senate drafts capping the surcharge at 15 percentage points before it was dropped. - The fight ended in a Group of Seven deal to exempt many U.S.-parented groups from key Pillar Two rules, and Section 899 was removed from the bill. (home.treasury.gov)
The United States tried to use its tax code as a bargaining tool in 2025, then dropped the threat after cutting a deal with Group of Seven partners. (home.treasury.gov) (bloomberg.com) The mechanism was proposed Section 899 of the Internal Revenue Code, added to Republicans’ tax package in the House on May 22, 2025. It would have increased U.S. tax rates on some investors and companies tied to countries the U.S. said imposed “unfair foreign taxes.” (sidley.com) (davispolk.com) Those “unfair” taxes included digital services taxes and parts of the Organisation for Economic Co-operation and Development’s Pillar Two minimum-tax system as implemented abroad. Senate drafts later narrowed the proposal and capped the extra rate at 15 percentage points. (gtlaw.com) (kirkland.com) Pillar Two is the global minimum-tax framework negotiated through the Organisation for Economic Co-operation and Development. Its core idea is to let countries collect extra tax when a multinational’s profits are taxed below 15% somewhere else. (home.treasury.gov) (taxnews.ey.com) The U.S. objected that foreign governments could use those rules to reach income of American-headed groups already subject to U.S. minimum-tax rules. Treasury Secretary Scott Bessent said on June 26, 2025 that the U.S. had reached a “joint understanding” with the other G7 countries. (eversheds-sutherland.com) (home.treasury.gov) The G7 statement on June 28, 2025 described a “side-by-side” approach. Under it, U.S.-parented groups would be exempt from the Income Inclusion Rule and Undertaxed Profits Rule, two central Pillar Two backstops, in recognition of existing U.S. minimum taxes. (home.treasury.gov) (taxathand.com) In exchange, Republican tax writers said they would remove Section 899 from the bill. Bloomberg reported the deal was designed to avert a broader tax fight between the U.S. and its allies. (bloomberg.com) (thomsonreuters.com) Business lawyers and tax advisers had warned that Section 899 could raise the cost of foreign investment into the U.S. by increasing withholding and other federal tax rates for residents of targeted countries. (davispolk.com) (kirkland.com) Critics of Pillar Two, including many U.S. Republicans, had cast the foreign rules as discriminatory toward American multinationals. Supporters of the Organisation for Economic Co-operation and Development framework argued it was meant to curb profit shifting and tax-base erosion across borders. (home.treasury.gov) (taxnews.ey.com) The episode left the tax code doing work that tariffs and formal trade talks often do: threaten costs first, then trade relief for policy concessions. By June 30, 2025, the “revenge tax” was out of the bill and the leverage had already done its job. (thomsonreuters.com) (home.treasury.gov)
