US Section 899: A Case Study in Tax Policy as Geoeconomic Leverage and Its Nuanced Success in Global Tax Negotiations

Governments routinely employ various forms of leverage in international negotiations to influence the policies or behaviors of their counterparts. While economic instruments such as sanctions and tariffs have long been recognized as potent geoeconomic tools, the strategic use of domestic tax policies in this arena has historically received less attention. However, recent developments, particularly the proposed US Section 899 legislation, have brought tax policy to the forefront as a significant, albeit controversial, instrument of economic statecraft. This article delves into the origins, mechanisms, and ultimate impact of Section 899, examining why it proved successful in achieving US policy objectives and exploring the broader implications for international relations and the future of geoeconomic tools.

The Evolving Landscape of Global Tax Policy: The OECD Two-Pillar Project

The backdrop to Section 899 is the ambitious Two-Pillar Project initiated by the Organisation for Economic Co-Operation and Development (OECD). For years, international tax rules struggled to keep pace with the digitalized global economy, leading to debates over how multinational corporations (MNCs) should be taxed. In October 2021, over 130 member jurisdictions of the OECD’s Inclusive Framework, including the United States, agreed to an outline for significant changes.

Pillar One aimed to reallocate a portion of taxing rights to market jurisdictions where MNCs have customers but may lack a physical presence. This proposal, intended to affect roughly $200 billion in profits, sought to address the proliferation of unilateral digital services taxes (DSTs) by providing a multilateral solution. However, Pillar One faced considerable hurdles. A draft multilateral treaty was published in October 2023, but the June 2024 deadline for a final agreement passed without resolution. The agreement between the US and several nations with discriminatory DSTs also lapsed, though Canada, which was not initially part of that agreement, notably abandoned its planned DST in June 2025, primarily targeting US tech firms, in a move seen as a response to US pressure.

Pillar Two, on the other hand, introduced a global minimum corporate tax of 15 percent, designed to increase taxes on companies operating in low-tax jurisdictions. This pillar was projected to increase global tax revenues by an estimated $220 billion. Implementation of Pillar Two began in 2024, with more than 65 countries having already introduced or adopted legislation to transpose its model rules into national law. Pillar Two encompasses three main taxes applicable to companies with revenues exceeding €750 million:

• Qualified Domestic Minimum Top-Up Taxes (QDMTTs): These identify corporations paying less than 15 percent on domestic income and "top up" the tax burden to 15 percent. QDMTTs take precedence, ensuring taxing rights remain with the country where the economic activity occurs.
• Income Inclusion Rule (IIR): This rule determines when a parent company’s foreign income should be taxed at a minimum 15 percent rate, calculated on a country-by-country basis with foreign tax crediting.
• Undertaxed Profits Rule (UTPR): This unprecedented rule allows countries to impose taxes on a business if it is part of a larger group paying less than 15 percent in another jurisdiction, even if the group is not headquartered in the country assessing the UTPR or if the profits are not generated there. This mechanism, in particular, raised concerns about tax sovereignty.

The US Stance and the Genesis of Section 899

Following the OECD’s initial agreement, the Biden administration struggled to implement the necessary changes to US tax law through a Democratic-controlled Congress before the Republican party gained control of the House in the 2022 midterms. This lack of US alignment with the global minimum tax framework left the US tax base vulnerable, meaning foreign governments could potentially levy higher taxes on US companies based on their effective tax rates within the US, primarily through the UTPR.

Republicans in Congress, led by House Ways and Means Chair Jason Smith (R-MO), emerged as vocal critics of the OECD process. They viewed the global minimum tax deal as discriminatory and an extraterritorial imposition on US sovereignty. Smith repeatedly signaled that a Republican White House would take corrective actions against what they perceived as an unconstitutional giveaway to China and an attack on American businesses.

This political rhetoric quickly translated into legislative action. In May 2023, Smith introduced a bill requiring the Treasury Department to identify foreign countries with extraterritorial and discriminatory taxes and to increase US withholding and income taxes on citizens, corporations, and partnerships tied to those countries. The proposed rates would escalate by 5 percentage points annually, up to a 20-point cap, 180 days after a country was listed.

Shortly thereafter, in July 2023, Rep. Ron Estes (R-KS) proposed a separate bill. This legislation sought to make the existing Base Erosion and Anti-Abuse Tax (BEAT), adopted in the 2017 Tax Cuts and Jobs Act (TCJA), more punitive for countries with "foreign-owned extraterritorial tax regime entities" operating in the US. This concept became colloquially known as "Super BEAT." Both bills shared a common objective: to impose significant economic costs on jurisdictions that levied DSTs or applied the OECD’s UTPR against American firms, albeit through different retaliatory tax mechanisms.

The Trump Administration and the Escalation to Section 899

The political landscape shifted dramatically following the 2024 presidential election. On his first day back in office, President Trump issued a Presidential Memorandum declaring the OECD’s Global Tax Deal to have "no force or effect" in the US. He instructed the Treasury Department to investigate foreign tax rules deemed discriminatory against US companies and to develop protective measures. Simultaneously, a separate memorandum on trade directed Treasury to investigate "whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes," explicitly referencing a 1934 retaliatory measure, Section 891.

The very next day, Chairman Smith reintroduced H.R. 59, the "Defending American Jobs and Investment Act," which provided for "enforcement of remedies against foreign countries that have extraterritorial or discriminatory taxes." This bill formally initiated the congressional process for developing what would become Section 899.

The momentum continued into May. On May 20, House Budget Committee Chairman Jodey Arrington (R-TX) introduced H.R. 1, later known as the "One Big Beautiful Bill Act" (OBBBA). This comprehensive bill included a retaliatory tax provision that strategically merged concepts from Smith’s and Estes’s earlier proposals. Just two days later, the House sent its budget reconciliation proposal, containing these provisions, to the Senate for consideration.

Dissecting Section 899: The House and Senate Proposals

The House version of Section 899, formally titled "Enforcement of Remedies Against Foreign Taxes," aimed to significantly raise US withholding and income tax rates on "applicable persons" from targeted countries. This increase would be 5 percentage points per year, capped at 20 points above statutory rates, potentially commencing as early as January 2026.

Beyond direct rate increases, the House proposal also sought to fortify the BEAT. The original BEAT, part of the TCJA, applied a 10 percent rate to large multinational corporations with over $500 million in average annual gross receipts, provided their base erosion percentage (deductible payments to foreign related parties) exceeded 3 percent. It also included exceptions for items like cost of goods sold and services cost methods. The House’s "Super BEAT" dramatically altered these parameters:

• The rate would increase from 10 percent to 12.5 percent.
• The $500 million gross-receipts threshold would be eliminated.
• The 3 percent base-erosion-percentage floor for inbound corporations tied to applicable persons would be removed, subjecting nearly all deductible payments to foreign affiliates to the tax, regardless of company size.
• Existing exceptions, such as those for cost of goods sold and the services cost method, would be turned off.
  Crucially, Section 899 explicitly named countries imposing a digital services tax, the UTPR, or a diverted profits tax as targets.

The Senate’s version largely maintained the structure but introduced several modifications to soften the House’s more aggressive stance. The rate increase was capped at 15 percentage points (down from 20) and applied against the treaty rate rather than the statutory rate, making it a ceiling rather than a de facto treaty override. The effective date was pushed back to January 2027, and portfolio interest (and related interest income) was specifically carved out, aiming to reduce the impact on foreign holders of US Treasury bonds or corporate bonds, a significant concession.

Regarding the "Super BEAT," the Senate also proposed innovations:

• The standard BEAT’s base erosion percentage threshold would be reduced from 3 percent to 2 percent.
• A new exception was proposed for high-tax related parties (defined as foreign related parties facing a rate at least 90 percent of the US rate, approximately 18.9 percent), focusing BEAT more on low-tax jurisdictions.
  For the "Super BEAT" specifically, the Senate aligned with the House in eliminating the $500 million gross-receipts threshold. It further increased the rate to 14 percent (from the House’s 12.5 percent). However, it retained a base erosion percentage threshold, albeit significantly reduced from 3 percent to 0.5 percent, rather than eliminating it entirely. It also turned off the newly proposed high-tax exception, in addition to those turned off by the House. These intricate differences underscored the intense legislative debate and the careful calibration of punitive measures.

The Diplomatic Resolution: A Side-by-Side Agreement

While Congress advanced the OBBBA with its Section 899 provisions, the US Treasury was simultaneously engaged in high-stakes negotiations with other G7 countries. The US sought a plan to exclude US-parented groups from the global minimum tax’s IIR and UTPR, viewing these rules as extraterritorial and a direct challenge to American sovereignty. The US already possessed multiple minimum taxes, including net CFC-tested income (NCTI), the corporate alternative minimum tax (CAMT), and Subpart F, which it argued should be recognized as equivalent to Pillar Two’s objectives. Indeed, a 2020 OECD Blueprint had initially envisioned such an equivalence determination for the US system before the Biden administration shifted its negotiating objectives.

Treasury Secretary Bessent made it clear: if a deal acknowledging the US system as equivalent for Pillar Two purposes was not reached, the US would proceed with Section 899. This credible threat proved instrumental. On June 28, 2025, the G7 nations finalized a statement on a "side-by-side" solution. This agreement exempted US-parented groups from the IIR and UTPR, contingent on Congress removing Section 899 from the OBBBA. Congress complied, and the OBBBA was signed into law on July 4, 2025, notably without the retaliatory tax provision.

Understanding the Leverage: Geoeconomics and Tax Policy

The success of Section 899 in prompting a policy shift among G7 allies raises crucial questions about the mechanisms of economic coercion and the role of tax policy as a geoeconomic tool. While no academic discipline specifically focuses on coercive tax measures, several established theories from economics, political science, and international relations offer valuable frameworks for analysis.

Economist Albert Hirschman’s 1945 work, National Power and the Structure of Foreign Trade, laid the intellectual groundwork by demonstrating how a dominant economy can structure trade relationships to create dependence, thereby gaining political influence. This "influence effect" goes beyond mere economic gains. Building on this, political scientists Robert Keohane and Joseph Nye, in their 1977 book Power and Interdependence, formalized the "sensitivity" and "vulnerability" framework, differentiating between the immediate costs of being affected by a policy shift and the long-term costs of escaping that dependence.

More recently, Henry Farrell and Abraham L. Newman’s 2019 article, "Weaponized Interdependence," introduced the concept of "chokepoints"—critical nodes in global economic networks that grant coercive power to states with jurisdiction over them. Rasmus Corlin Christensen extended this idea to tax policy, arguing that the US "weaponized its access to major financial institutions to coerce radical information access from foreign banks." This aligns with empirical measurements by Matteo Maggiori, Christopher Clayton, and Jesse Schreger, who, drawing on Robert Dahl’s definition of power, analyze how a hegemon can alter a target’s "inside option" (complying) or "outside option" (refusing) until compliance becomes the least costly choice.

David Baldwin, in his seminal 1985 work Economic Statecraft, defined it as the use of economic means to achieve foreign policy goals. He categorizes taxation as both a "positive and negative sanction," explicitly including discriminatory taxation against foreign assets. Section 899 fits squarely within this broad literature, operating as a negative sanction designed to alter the behavior of other governments.

Three Theories for Section 899’s Success:

1. The Prevailing View in Washington: Access to the US Market as a Chokepoint. This theory posits that access to the vast US financial market is simply too vital for citizens and firms of targeted countries to risk facing increased tax rates. Once Section 899 became draft legislation, firms that stood to lose from its implementation successfully lobbied their home governments to agree to the side-by-side solution. This perspective blends Drezner’s "sanctions paradox" – that allies with "low-conflict expectations" are more likely to concede to credible threats – with Maggiori’s framework, where compliance becomes the better option when the costs of refusal are too high. The existence of a clear "off-ramp" in the US legislative process, allowing the threat to be credibly removed upon concessions, further contributed to its success.

2. The "Make It Right" Idea: A Contingency Plan for Allies. This theory suggests that countries involved in the BEPS/Inclusive Framework process always understood the US system, adopted in the 2017 TCJA, represented the first global minimum tax. The original 2020 OECD Blueprint had even envisioned grandfathering the US rules through an equivalence determination. While the Biden administration adopted a more conciliatory approach, allies were aware that a Republican return to power, as clearly communicated by Congressional Republicans, would likely revert to the 2020 logic. Thus, agreeing to the side-by-side solution, while appearing to "give in" to Trump’s threats, was in fact a pre-existing contingency plan, allowing them to salvage parts of the Pillar Two framework while accommodating a core US demand that was arguably rooted in the original spirit of the negotiations.

3. The EU’s Geoeconomic Calculation: Preserving Pillar Two’s Enforcement Mechanisms. Rasmus Corlin Christensen’s "weaponized interdependence" framework highlights the EU’s potential leverage through its market access in global tax policy. Given that 80 percent of the world’s largest MNCs have a legal presence in the EU, the EU could wield significant influence. From this perspective, Section 899’s success was not merely about avoiding US retaliatory taxes, but about the EU’s strategic decision to preserve the remaining pieces of the reformed international tax system, particularly the UTPR, for its domestic European audiences. Policymakers from other countries negotiated for US firms to still comply with QDMTTs as part of the SbyS agreement, and the UTPR remained in place for non-US headquartered companies. This provided the EU with an enforcement tool to reshape tax competition dynamics, making the removal of Section 899 a worthwhile compromise to maintain the broader Pillar Two architecture, even if it meant accepting QDMTTs as a sufficient outcome.

Misinterpretation Is Costly: The Risks of Overreliance

Misinterpreting the specific reasons behind Section 899’s success could have severe long-term consequences for the US economy. According to Tax Foundation research, Section 899 would have negatively impacted inbound investment from countries representing over 80 percent of US inbound foreign direct investment (FDI) stock. Overleveraging access to the US financial system and dollar-based infrastructure could incentivize allies and competitors alike to seek dependency-reducing alternatives. Even a marginal decrease in demand for dollars could destabilize the bond market, threatening the sustainability of US debt and eroding the "exorbitant privilege" afforded by the dollar’s global reserve status. Overuse of a hegemon’s chokepoint can, paradoxically, diminish its long-term efficacy.

Lessons from Europe: Mixed Success in Economic Statecraft

While the EU lacks a direct analogue to Section 899 due to national tax competencies and the euro’s different role, it has also experimented with leveraging market access for geoeconomic objectives. Anu Bradford’s "Brussels Effect" argues that the EU can influence firm behavior globally through regulation without directly coercing governments, with firms lobbying their own governments to align with EU standards to reduce compliance costs. Joanne Scott similarly emphasizes "territorial extension" over extraterritorial legislation, where the EU "action-forces" global action on transboundary problems.

However, the EU’s track record with explicitly coercive tax and trade tools presents a more mixed picture:

• Carbon Border Adjustment Mechanism (CBAM): Designed to enforce Paris Climate Accords commitments, CBAM requires payments at the EU border for imported products from jurisdictions without an equivalent domestic carbon price. While it positions the EU strongly in negotiations, major economies like the US, China, and India have not adopted equivalent carbon prices. Critics, including the US Ambassador to the EU, label it a tariff, and BRICS nations have denounced it as "unilateral, punitive, discriminatory and protectionist." Despite the rhetoric, only Russia has formally lodged a WTO complaint, suggesting that market access alone might not guarantee policy compliance without domestic political buy-in from targeted countries.
• Pillar Two Directive (EU Implementation of UTPR): As an early adopter, the EU is leveraging its market to enforce Pillar Two rules, even if third jurisdictions haven’t adopted them domestically. While many countries have moved toward Pillar Two, key economic rivals like China and India have not. The EU’s strong interest in maintaining and enforcing Pillar Two highlights its role as a potential enforcer in the absence of full US participation.
• EU List of Non-Cooperative Jurisdictions for Tax Purposes: This list, updated semi-annually, identifies jurisdictions deemed non-compliant with OECD standards on tax transparency and anti-abuse. Member States can impose defensive measures, and listed jurisdictions may lose EU funding. Critics argue the list is more geopolitical than technical, noting the absence of EU Member States regardless of compliance and suggesting political calculations determine targets. A World Bank report found that while being reviewed increased the odds of joining the OECD/G20 Inclusive Framework, blacklisting itself had no discernible impact on offshore wealth or profit shifting because the primary hosts of such activities were not targeted.

The European experience demonstrates that simply restricting access to a large economy does not guarantee other countries’ compliance. While it can facilitate international coordination, the EU Single Market, much like the US market, may not function as an absolute global "chokepoint." Such actions also entail real economic costs for European consumers and firms.

Section 899 vs. Tariffs: Distinct Dynamics

Superficially, European DSTs and US tariffs share similarities with Section 899: all are forms of economic coercion, often against allies, and typically offer a path for removal if conditions are met. European nations maintained their DSTs would be removed upon a multilateral agreement on taxing rights, while US tariffs often aimed to reform global trade relations.

However, DSTs and many US tariffs suffer from a critical flaw: they are unilateral moves lacking underlying international consensus, attempting to rewrite established norms through public coercion. Section 899, in contrast, possessed elements that made it uniquely successful:

• Clear Off-Ramp: The G7 side-by-side agreement provided an explicit, negotiated pathway for Section 899’s removal.
• Underlying Willingness to Negotiate: Despite the aggressive stance, there was an implicit understanding among G7 allies about the US’s historical position and the need for some accommodation.
• Obvious Fallback Position: The 2020 OECD Blueprint’s original vision of grandfathering the US system provided a mutually recognizable, if previously sidelined, alternative.

These elements, largely absent in the unilateral imposition of DSTs or erratic tariffs, differentiate Section 899. Unilateral attempts to reform complex international systems like tax or trade without broad consensus are inherently more difficult and risk damaging alliances and established frameworks.

Strategic Considerations for Future Geoeconomic Tax Tools

The Section 899 episode offers a fascinating new template for US policymakers considering coercive tax policies. Leveraging access to the US financial system is indeed a core tenet of American economic statecraft, and in the case of the UTPR, the costs of US non-action were significant, including fiscal implications, potential double taxation, and an erosion of tax sovereignty. However, before reintroducing similar templates, policymakers must meticulously weigh various questions:

1. Distinct Coercive Dynamics: Did Section 899 create coercive dynamics fundamentally different from traditional tariffs or sanctions? Understanding the unique characteristics of domestic tax policy as a coercive tool, beyond its revenue-generating function, is crucial.
2. Lobbying Power of Targeted Firms: To what extent was Section 899’s success attributable to the lobbying efforts of foreign companies that would have been negatively impacted? "Weaponizing" targeted firms against their own governments, similar to aspects of the "Brussels Effect" but with an explicit coercive element, is a powerful strategy.
3. Adversaries vs. Allies: Would a Section 899-style tactic succeed against adversaries rather than allies? Drezner’s "sanctions paradox" suggests such threats are more likely to fail against adversaries. The long-term impact on allied relationships also demands careful consideration.
4. Reshaping International Systems: Is it realistic for economic powers like the US or EU to unilaterally reshape international tax or trade systems without broad-based consensus? The transatlantic relationship, if collaborative, could drive global reform, but it requires mutual recognition of benefits and costs of compromise.
5. Economic Costs vs. Benefits: What would have been the full economic cost of enacting Section 899 to US economic growth, US debt exposure risk, and the dollar’s status as the global reserve currency? A thorough cost-benefit analysis, including the potential for foreign investors to seek safer capital destinations, is essential.
6. Credibility of the Threat: Why did G7 countries view Section 899 as a credible threat? Understanding the factors – whether asymmetric information during the US legislative process, the perceived economic costs to targets, domestic political pressures, or the impact on foreign US bondholders – is vital for assessing the likely success of future coercive tools.
7. Costs of Non-Action: Crucially, policymakers must consider the costs of not acting. In the UTPR case, the financial and sovereignty costs to the US were substantial. Sometimes, the costs of inaction can outweigh the costs of deploying a coercive tool.

Conclusion

Section 899 represents a significant moment in the evolution of economic statecraft, demonstrating the potential of domestic tax policy as a geoeconomic tool. Its success in achieving a G7 side-by-side solution can be reasonably attributed to the US effectively weaponizing access to its powerful financial chokepoint against allies. These allies, facing significant economic and political pressures, ultimately determined that adjusting their approach to international tax reform was in their best domestic and international interests. The US demand was clear, manageable, and critically, offered a transparent path for the threat’s removal upon policy change. This nuanced outcome challenges the simplistic notion that a hegemon’s demands are always met through sheer economic might.

As policymakers consider deploying other geoeconomic tools, whether tariffs or market-access enforcement mechanisms, they must recognize that economic size alone is insufficient to guarantee international policy goals in an increasingly interdependent world. A one-size-fits-all approach is unlikely to yield high success rates. Instead, identifying focused areas of cooperation with allies to achieve strategic international outcomes will likely prove more effective. Section 899 demonstrated that economic leverage, judiciously applied against allies, can be successful in mitigating damaging policies with relatively low costs to the sender. The enduring challenge, however, will be for policymakers to discern precisely when, under what conditions, and at what ultimate cost such coercion can genuinely succeed.