Section 899 - The art of the tax deal

The “Revenge Tax”

The “One Big Beautiful Bill Act” (OBBBA) has emerged as one of the most consequential pieces of US tax legislation in recent memory, not only for its domestic implications but also for its potential to reshape the global tax landscape. Introduced in early 2025, the bill consolidates several prior legislative efforts aimed at promoting both domestic economic priorities and international tax policy concerns.

Initially, the media and political focus was targeted at the headline-grabbing elements of the OBBBA—such as the extension of the 2017 tax cuts, the rollback of green energy credits, and the introduction of new individual tax benefits. However, embedded within the dense legislative language of the House-passed version of the bill was Section 889. Often referred to as the “Revenge Tax”, Section 899 was designed as a retaliatory measure against jurisdictions that had implemented tax policies on US businesses deemed as “unfair foreign taxes” by the Treasury. It wasn’t until the Senate began reviewing the bill that Section 899 garnered significant attention from policymakers, multinational corporations, and global investors on the back the concerns about potential treaty violations and capital flight.

The inclusion in the OBBBA, subsequent modification, and eventual removal-following an agreement with the G7-represents an interesting case study of how Section 899 became Washington’s fiscal bargaining chip through the complex interplay between domestic legislation and international diplomacy.

The legislative journey

The legislative journey of Section 899 has been anything but straightforward. Initially introduced as part of the Defending American Jobs and Investment Act and later incorporated into the broader OBBBA, the provision passed the House on 22 May 2025, by a narrow margin. However, the Senate Finance Committee’s version of the bill, released in mid-June, introduced several key modifications in response to mounting pressure from the financial sector, multinational corporations, and international allies.

Section 899 consisted of two main components. First, it sought to impose additional US income and withholding tax on payments made to individuals or entities connected to countries enforcing “unfair” tax regimes. Second, it proposed a significant expansion in the scope of the Base Erosion and Anti-Abuse Tax (BEAT). Originally introduced in the 2017 Tax Cuts and Jobs Act (TCJA), BEAT was designed to prevent large multinational corporations from reducing their US tax base by making deductible payments (like interest, royalties, or service fees) to foreign affiliates. These so called “Super BEAT” provisions targeted US corporations and branches that were majority-owned by foreign entities based in jurisdictions deemed to be non-compliant.

Overall, the House and Senate versions of Section 899 shared the same overarching goal but differed in key areas. The House version was more aggressive in its scope and timing. In contrast, the Senate Bill took a more measured approach, with delayed implementation, a narrower range of targeted taxes, and a lower cap on tax rate increases. However, despite the differences, both versions would have had a broad and disruptive impact by allowing the US Treasury to impose additional, far-reaching taxes on foreign investors and companies.

The most recent and dramatic development in the evolution of Section 899 came in late June, when Treasury Secretary Scott Bessent announced a breakthrough deal with the G7 – Canada, France, Germany, Italy, Japan, and the United Kingdom. Under this agreement, these countries committed to exempting US companies from the OECD’s Pillar 2 Undertaxed Profits Rule (UTPR). In return, the US agreed to withdraw Section 899 from the OBBBA. UTPR fell under the guidelines laid out in Section 899 meaning that countries implementing the OECD rules would have faced increased taxes if had become law. The deal was framed as a mutual effort to respect national tax sovereignty while maintaining alignment with global tax reforms.

For context, the OECD’s Pillar Two framework is part of a broader initiative to address tax Base Erosion and Profit Shifting (BEPS) by multinational enterprises (MNEs). It was established in October 2021 as part of a global agreement to implement a 15% minimum corporate tax for large multinationals with revenues above €750m. It began enforcement in 2024 with the Income Inclusion Rule (IIR), which taxes the income of foreign subsidiaries if they are taxed below the minimum rate. This was followed by the UTPR which came into effect in January 2025 and allows other jurisdictions to deny deductions or impose top-up taxes if the IIR is not applied. The overall goal of the framework is to ensure that these companies pay a fair share of tax regardless of where they operate, reducing incentives to shift profits to low-tax jurisdictions.

During his presidency, Joe Biden strongly supported Pillar 2, viewing it as a cornerstone of international tax reform. Biden’s Treasury Department, under Secretary Janet Yellen, made moves to pass domestic legislation that would align US tax policy with the framework.

However, despite these efforts, Congress never enacted a formal bill to incorporate Pillar Two into US law. In contrast, President Trump has been a strong critic of the framework. Upon returning to office in January 2025, Trump issued an executive order that effectively withdrew the US from any commitments made under the OECD global tax deal.

Overall, this diplomatic resolution marked a significant de-escalation in what had threatened to become a tax war between the US and several of its key trading partners. Whether intentional or not, Section 899 created a credible deterrent and became a legislative embodiment of the “art of the deal”. By threatening to impose retaliatory taxes on foreign entities, the US was able to achieve a more favourable outcome by forcing other nations to re-evaluate their own tax policies.

What happens next?

Following its removal from the OBBBA, Section 899 now enters a period of legislative dormancy, though its underlying policy objectives of US protectionism remain very much alive. The Treasury has signalled it will continue to work through the ‘OECD-G20 Inclusive Framework’ to ensure that the commitments made by G7 partners are implemented consistently. Should any country deviate from the agreement or reintroduce measures targeting US firms, the legislative groundwork laid by Section 899 could be revived. In this sense, the provision now functions as an enforcement tool—a legislative deterrent rather than an active policy.

It is also worth noting that the G7 agreement focused primarily on Pillar Two and UTPR, leaving questions about the treatment of Digital Services Taxes and Diverted Profits Taxes. While these measures were removed from the Senate version of Section 899, they were explicitly identified in the House-passed draft as examples of “unfair foreign taxes”. Although the issues may have been temporarily set aside, they could resurface as potential targets in future negotiations.

The Senate narrowly passed the remaining parts of OBBBA on 1 July with Vice President JD Vance casting the tie-breaking vote. This sent the amended legislation back to the House of Representatives for final approval. The Trump administration had been actively pushing for a symbolic 4 July signing ceremony to align the bill’s enactment with American Independence Day. Given the original House version passed by just one vote, many commentators doubted whether the revised bill could clear the House in time. The Senate’s amendments, which included changes to tax credits, deductions, and Medicaid provisions, introduced new complexities that risked delaying the process.

However, in a dramatic overnight session on 3 July, the House passed the updated bill with a relatively comfortable 218–214 vote. This outcome avoided the need for a conference committee, which would have been required if the House had rejected the Senate’s version. Such a move could have triggered a prolonged negotiation process between both chambers, potentially pushing the signing past the deadline.

Ultimately, Trump was able to deliver what he called a “birthday gift to America”. Surrounded by key congressional allies, he signed the bill into law at the White House on 4 July. Just over five months into his second term, the event marked a major legislative victory for the president.

Portfolio implications

From a portfolio point-of-view, the saga of Section 899 carries important implications. The eventual removal of the provisions has eased concerns around potential disruptions to cross-border capital flows and the wider US economy. However, the mere prospect of retaliatory tax measures has introduced a new layer of geopolitical and regulatory risk that should be factored into portfolio decisions. In a world that is currently being driven by policy uncertainty in the US, investors must continue to be vigilant in their understanding of international tax frameworks and take a hands-on approach in monitoring legislative developments. The developments of Section 899 serve as reminder of how quickly shifts in tax regimes can materialise and change with potential to drive spikes in volatility.

With the “Revenge Tax” dead before it even started, attention is likely to turn back to the remaining policies included in the OBBBA. These changes will carry significant implications for financial markets, particularly through its impact on fiscal dynamics and investor behaviour. The OBBBA introduces several provisions, such as tax relief and accounting changes, that could provide near-term support for corporate earnings and consumer spending. However, the combination of tax cuts and spending extensions is expected to widen the fiscal deficit, raising concerns about long-term fiscal sustainability. Estimates from the Congressional Budget Office (CBO) show that the legislation would increase federal deficits by over $3tr over the next 10-years. This could place upward pressure on longer-dated Treasury yields if investors demand higher compensation for inflation and credit risk.

Policy uncertainty also continues to pose a headwind. The removal of Section 899, while diplomatically stabilising, underscores the volatility of US tax policy. Many of the OBBBA’s provisions are politically contentious, and with limited visibility on the direction of US policy, investor confidence in making sustained capital commitments may be dampened – especially in sectors highly sensitive to tax and regulatory changes. As a result, while OBBBA offers short-term stimulus, its longer-term market impact will likely hinge on fiscal credibility and policy continuity.

Section 899 underscores the importance of a proactive, forward-looking approach to portfolio management. Investors must remain vigilant, continually reassessing exposures and incorporating evolving international tax dynamics into their strategic outlook.

Conclusion

In conclusion, the One Big Beautiful Bill Act – and Section 899 in particular – marks a watershed moment at the intersection of tax policy, international diplomacy, and global capital markets. Whether Section 899 re emerges in a revised form or is replaced by more nuanced enforcement tools, one thing is clear: tax policy has moved beyond its traditional role of revenue collection and domestic economic management. It is now in the limelight as an instrument that can meaningfully shape international dynamics.

The strategic deployment of Section 899 reflects a broader shift to protectionist economic policies in the US. In a world of growing geopolitical complexity, Washington has shown a growing willingness to use domestic legislation as leverage in international negotiations. Whether in trade, technology, or taxation, the US is increasingly relying on unilateral tools to assert its interests and counter perceived external threats. Section 899 exemplifies this approach, serving not merely as a tax provision, but as a calculated bargaining chip. Its evolution illustrates how fiscal policy can be weaponised to achieve diplomatic objectives. As US continues with its trade negotiations, Section 899 will stand as a case study in the art of the tax deal – offering valuable lessons for policymakers, investors, and analysts alike.