UPDATE: U.S. Treasury Department Reaches Agreement in Principle with the G7 to Drop Proposed Section 899 in Exchange for a U.S. Company Exclusion from Pillar Two

The U.S. Treasury Secretary announced on June 26^th that an agreement was reached with the G7 countries (Canada, France, Germany, Italy, Japan, and the UK) under which “U.S. companies” will be excluded from the scope of Pillar Two taxes, notably including the UTPR (under-taxed profits rule),  in exchange for Republican sponsors removing proposed Section 899 from the draft One Big Beautiful Bill Act currently being considered by Congress.

The Chairmen of both the House Ways and Means Committee (Jason Smith (R-MO)) and the Senate Finance Committee (Mike Crapo (R-ID)) stated:

At the request of Secretary Bessent and in light of this joint understanding to preserve U.S. tax sovereignty and allow U.S. tax laws to co-exist with the Pillar 2 regime, we will remove proposed tax code Section 899 from the One, Big, Beautiful Bill Act, and we look forward to active engagement with Treasury on these important issues.

As proposed, section 899 would have imposed significant increased taxes on, and applied an expanded BEAT regime to, certain non-U.S. corporations and individuals resident in countries that adopted Pillar 2, digital services taxes (DST), diverted profits taxes (DPT), or any other tax deemed by the U.S. Treasury Secretary to be discriminatory or extraterritorial (See our client alert published on June 20 on this topic).

While no additional detail has been shared as yet regarding the precise scope of the “U.S companies” exclusion, given the Treasury Department’s long stated goal of preventing Pillar 2 from applying to income that is already subject to U.S. taxation, it seems reasonable to expect that the scope will include U.S. corporations per se, but also may extend to cover the U.S. taxable profits of foreign corporations, including controlled foreign corporations that are more than 50% owned, by vote or value, by U.S. persons (CFCs).  The House committee report to proposed Section 899 had previously clarified that a UTPR was intended to be treated as an “unfair foreign tax” only if it applies to the income of U.S. corporations and their subsidiaries (https://www.congress.gov/committee-report/119th-congress/house-report/106/2) and proposed Section 899 defined a UTPR (along with DSTs and DPTs) as a per se unfair foreign tax, but only if it applies to U.S. persons or to controlled foreign corporations that are more than 50 percent owned, by vote or value, by U.S. persons. We will have to await further information to confirm the scope and mechanics of the exclusion. It seems clear, however, that the United States is satisfied that the G7 agreement will address their UTPR concerns.

While the Pillar 2 UTPR was the engine driving the Section 899 proposal, Section 899 was also meant to address DSTs and DPTs as “unfair foreign taxes”, neither of which are directly resolved via this G7 agreement. Thus, a question remains as to whether there will be a separate initiative to address those tax regimes, or if U.S. negotiations that are already in play will produce a resolution.