Proposed Section 899: A Retaliatory Tax Threat to U.S. Subsidiaries of Foreign MNEs

Section 899 spells trouble for U.S. subsidiaries of foreign-parented companies. Much like the blunt instrument of reciprocal tariffs, its punitive measures feel retaliatory—and if enacted, could ignite a new wave of tax wars, chilling foreign investment and sparking global uncertainty.

The Hammer Drops: Section 899’s Key Measures

The proposal targets investors from countries deemed to impose "unfair foreign taxes" on U.S. firms with:

• U.S.-source income faces up to 20-point hikes—overriding treaty rates.

• Inbound corporations hit by the Base Erosion and Anti-abuse Tax (BEAT), even if they fall below normal thresholds.

• R&D credits and Services Cost Method (SCM) safe harbors slashed, pushing effective tax rates (ETRs) above 50% for some.

• Higher taxes on effectively connected income (ECI) from U.S. operations.

Fallout: Higher Costs, Lower Investment

The immediate impact? Skyrocketing ETRs for U.S. subsidiaries—and a likely domino effect:

• Reduced U.S. investment as M

  NEs restructure to avoid the brunt.

• Retaliatory measures from countries with digital services taxes (DSTs), UTPRs, or diverted profits taxes (DPTs).

A Dangerous Precedent: Tariff Wars 2.0?

History rhymes: Just as tariffs triggered trade skirmishes (not negotiations), Section 899 risks escalating tax conflicts. Will countries:

• Back down and negotiate? Unlikely—DSTs and UTPRs are fiscal lifelines for many.

• Double down with matching penalties? More probable.

The Bottom Line

While the U.S. aims to "protect" its tax base, Section 899’s collateral damage—higher costs, fractured treaties, and investor flight—may outweigh any gains. One thing’s certain: U.S. subsidiaries will pay the price.