Lawmakers Threaten to Resurrect ‘Revenge Tax’ Over Pillar Two Negotiations

Republican lawmakers are threatening to revive the reciprocal tax regime under proposed Section 899 if the U.S. can’t reach an agreement with the Organisation for Economic Co-operation and Development (OECD) to exempt U.S. multinationals from major Pillar Two rules.

Early drafts of the One Big Beautiful Bill Act (OBBBA) included a provision under Section 899 that would have imposed new taxes on non-U.S. residents and entities from jurisdictions that impose “unfair foreign taxes.” The proposal was dropped from the legislation after the U.S. announced an initial agreement with the G-7 countries to seek a broader agreement on exempting the U.S. from some Pillar Two taxes. The OECD subsequently issued a statement welcoming the G-7 announcement. The U.S. is currently working to reach a compromise with the OECD and the EU before year-end on a “side-by-side” system whereby U.S.-parented groups would be exempt from the income inclusion rule (IIR) and the undertaxed profits rule (UTPR), but many complex issues remain outstanding.

If negotiations fall apart, “we will absolutely pass that bill” reviving Section 899, said House Ways and Means Chair Jason Smith, R-Mo. “That’s how important it is.”   

Treasury Assistant Secretary for Tax Policy Kenneth Kies similarly told House Republicans during a September 9 meeting that Treasury would support them in reviving the provision if the OECD doesn’t reach agreement on a U.S. exception.

Enacting Section 899 would present major challenges, and the comments from Smith and Kies may largely be posturing at this point. Democrats appear unlikely to support Section 899, at least not without major policy concessions, so Republicans would likely be forced to use the reconciliation process to pass the legislation. 

House Republican leadership has teased the idea of a second reconciliation bill, but it faces hurdles. Senate Republicans and even Smith have generally not been supportive, with Smith saying recently on Squawk Box, a CNBC business news TV show, that “I believe we delivered on everything that the president promised to the American people and campaigned on in this bill.”

“A second reconciliation bill, I think it will be a whole lot more difficult to move through the system,” he said later on Bloomberg TV.

A Supreme Court decision overturning some of the president’s tariff authority could change the outlook for a reconciliation bill if Republicans sought to implement the tariff agenda legislatively. There’s no guarantee, however, that any tariff legislation would include tax provisions.

Negotiations over Pillar Two have proven contentious, and both the EU and OECD are consensus-based organizations where major changes may require near or total unanimity. The U.S. is reportedly seeking to fully exempt U.S.-parented multinationals from the IIR and the UTPR. Presumably, IIRs could still apply to U.S. subsidiaries of foreign parents. The U.S. is pushing to exclude nonrefundable credits from the calculation of effective tax rates for the IIR, similar to the treatment accorded to refundable tax credits.

The qualified domestic minimum top-up taxes (QDMTTs) of other countries would still apply before taxes on net CFC tested income (NCTI), formerly known as global intangible low-tax income, though the U.S. is asking for an optional “pushdown” that would allow countries to apply NCTI before QDMTTs.

Other countries are pushing back on some of the U.S. demands, arguing that a compromise could give U.S. companies an unfair advantage. Major questions remain over many details, including the effective date of any relief, the application or exception from reporting and compliance rules, and the impact on “sandwich” and other complex cross-border structures. 

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