US response to discriminatory or extraterritorial tax regimes - Section 891 and proposed Section 899

In brief

What happened?

In a Day One Executive Order, on January 20, 2025, President Trump directed the Treasury Secretary, in consultation with the Commerce Secretary and US Trade Representative (USTR), to investigate whether any foreign country subjects US citizens or corporations to discriminatory or extraterritorial taxes pursuant to Section 891 and to provide a report coordinated by the Treasury Secretary that is to be delivered by April 1, 2025. Additionally, under the proposed Defending American Jobs and Investment Act recently introduced in the House, a new Section 899 would impose additional taxes on certain income earned by citizens of, or corporations formed in (or tax resident in), jurisdictions that have a tax regime considered discriminatory or extraterritorial in relation to US citizens or corporations.  

Most recently, on February 21, 2025, President Trump signed an Executive Order that directs the Treasury Secretary, in consultation with the Commerce Secretary and USTR, to determine whether any foreign country subjects US citizens or companies to discriminatory or extraterritorial taxes, such as digital services taxes (DSTs), or has any measure in place that otherwise undermines the global competitiveness of US companies, is inconsistent with any tax treaty of the United States, or is otherwise actionable under Section 891 or other tax-related legal authority. The results of this determination are to be included as part of the report required in section 2 of the January 20 Executive Order on the OECD global tax agreement, which is to be delivered within 60 days (i.e., by March 21, 2025). 

Why is it relevant? 

The United States is considering various approaches to respond to foreign countries that are considered to impose discriminatory or extraterritorial taxes against US citizens or corporations. Based on recent Executive Orders, these taxes could include various DSTs and taxes under the Pillar Two OECD global tax agreement, such as the under taxed profits rule (UTPR). One approach is under existing Section 891, which would, pursuant to a Presidential proclamation, double certain US tax rates on certain foreign persons for the tax year in which the proclamation is made, regardless of whether the income was earned before or after the date on which the proclamation is made. Another approach is under proposed Section 899, which has been introduced in the House, that would impose additional taxes of up to 20% on certain income of certain foreign persons, notwithstanding existing treaty obligations. 

Actions to consider

Given the timeline for these investigations and the possibility of further Presidential action consistent with these Executive Orders, taxpayers should be considering any potential adverse effects, including (but not limited to) effects on payments that are subject to withholding under US domestic law, even if a treaty currently eliminates or reduces that tax.