In a significant development in global tax diplomacy, the United States (U.S) has agreed to drop proposed Section 899 retaliatory taxes as part of an international accord under the OECD’s Pillar II framework. This move comes amongst ongoing negotiations aimed at creating a fairer global minimum tax regime and easing tensions between the U.S. and countries implementing their own digital services taxes or minimum top-up taxes under Pillar II. Refer to the below extract for further details.
"U.S. drops proposed Sec. 899 retaliatory taxes in Pillar 2 deal
The U.S. Treasury Secretary announced on June 26 that an agreement has been reached with the nation’s G-7 peers (Canada, France, Germany, Italy, Japan, the UK) to exclude U.S. companies from Pillar Two taxes under the OECD tax agreement, clearing the path for the U.S. Congress to pull back a threatened retaliatory tax regime known as Section 899. Secretary Scott Bessent did not immediately provide further details of the deal, saying only that the U.S. “will work cooperatively to implement this agreement across the OECD-G20” in the “coming weeks and months,” and that it would eliminate the need for a provision in the Republican tax bill working its way through Congress that would impose higher taxes on companies from jurisdictions that have implemented certain “unfair foreign taxes,” including Pillar 2 taxes imposed under those jurisdictions’ respective undertaxed profits rule (UTPR).
Congress’ top Republican taxwriters, Senate Finance Committee Chair Mike Crapo of Idaho and House Ways and Means Committee Chair Jason Smith of Missouri, followed Bessent’s announcement with a short joint statement lauding the agreement and indicating they will remove proposed Sec. 899 from the One Big Beautiful Bill Act.
“At the request of Secretary Bessent and in light of this joint understanding to preserve U.S. tax sovereignty and allow U.S. tax laws to co-exist with the Pillar 2 regime, we will remove proposed tax code Section 899 from the One Big Beautiful Bill Act, and we look forward to active engagement with Treasury on these important issues,” they said, adding, “Congressional Republicans stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation.”
The proposed Section 899 would have introduced a two-pronged retaliatory regime: one component would have imposed additional income tax and withholding charges on payments made to persons tied to jurisdictions imposing unfair foreign taxes; the second would have expanded the application of the Base Erosion and Anti-Abuse Tax (BEAT) to companies owned by persons tied to those jurisdictions.
Grant Thornton will provide further insight as details of the agreement become clear. " - Cory Perry, Storme Sixeas
Conclusion:
For U.S. multinational companies operating in countries like South Africa, which has committed to implementing Pillar II rules, this policy shift provides much-needed clarity and relief for both the South African legislator and multinationals with operations in the U.S. The removal of potential retaliatory tax measures could potentially reduce the risk of double taxation and signals a more cooperative international tax environment, potentially lowering compliance costs for multinationals and uncertainty for American companies with a global footprint.
