The tax portion of a major budget bill moving through Congress includes several provisions affecting how the US taxes foreign income. Beyond extending international provisions of the 2017 Tax Cuts and Jobs Act (TCJA) as expected, the draft bill also increases US taxes on income earned in the US by some foreign nationals in a new way, similar to previous legislation introduced by Republicans in 2023 and reintroduced in January 2025.
The Joint Committee on Taxation (JCT) estimates this new approach would raise significant revenues—about $120 billion between 2026 and 2030. It would also give leverage to the administration and increase pressure on foreign countries to change how they tax US multinationals. But, as written, the proposal has significant legal and practical challenges, and could change the role of the US in global business.
Part of a broader effort to protect US corporations
On his first day in office, President Donald Trump signed an Executive Order rejecting the global corporate tax deal backed by the Biden administration but opposed by congressional Republicans who viewed it as threatening US fiscal sovereignty.
At issue was an enforcement mechanism in the global agreement known as the Undertaxed Profits Rule (UTPR). Trump further directed Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer to investigate potential retaliatory measures against foreign countries that “have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies.”
Since then, President Trump has signed additional executive orders examining and decrying foreign taxes that sometimes apply to US multinationals. The orders have mentioned “unfair, discriminatory, or extraterritorial taxes” in relation to value-added taxes and more recently digital service taxes.
The provision focuses on interest, dividends, and royalties
There are two broad categories of income earned by foreign persons in the US. “Effectively connected income” (ECI) results from trading or doing business in the United States. The US taxes ECI under the individual or corporate income tax.
Fixed, determinable, annual, or periodical (FDAP) income includes interest, dividends, or royalties. FDAP income faces a 30-percent tax rate withheld at the source. Most foreign individuals do not pay tax on FDAP income because of unilateral exemptions for interest and capital gains. For example, taxes are not withheld on interest paid to a British citizen, while a 5 to 15 percent withholding rate applies to dividends. And most foreign corporations benefit from a lower tax rate specified by tax treaties.
The proposal would substantially alter this framework: It mostly targets FDAP income, as well as some capital gains, such as those from selling real property, and increases the applicable tax rate “with respect to any discriminatory foreign country” by 5 percent each year, with a maximum of 20 percent. If the US determines the United Kingdom (UK) has discriminatory taxes, the US could withhold 35 percent of dividend payments to British citizens by 2030.
In addition to the higher rate on US-earned income, the proposal would amend the TCJA’s Base Erosion Alternative Minimum Tax (BEAT) so that majority-foreign-owned corporations pay a 12.5 percent rate as opposed to the 10 percent rate paid by US-owned corporations.
Most European and other countries would be affected
The proposal stipulates that the higher taxes would apply to foreign countries deemed by the Treasury Secretary to have “unfair foreign taxes.” Value-added taxes, broadly used consumption taxes around the world, are not among unfair foreign taxes named in the bill. Instead, the UTPR, extraterritorial or other discriminatory taxes, and digital service taxes would be affected.
Most European Union member states, and countries including South Korea, Australia, Thailand and the UK, have a UTPR. Digital services taxes (DST) are growing in popularity. As of March 2025, major economies with a DST include France, the UK, Canada, Italy, and Turkey. As the proposal stands, residents of these countries may pay higher taxes on income earned in the US.
This provision faces challenges
The basic problem: It only applies to foreign individuals and foreign corporations. In the short-term, foreign multinationals operating in the US can incorporate their subsidiaries and avoid foreign payments. The law may have a bigger impact on foreign banks with US branches that cannot incorporate for regulatory reasons. Ultimately, if the higher rates apply, it will make investing in the US much less attractive for many foreign companies and investors.
And, critically, tax treaties assure that most foreign individuals are exempt from US tax or pay a lower rate on their FDAP and that most foreign corporations also benefit from lower withholding tax rates. The large projected revenues will likely be smaller if the law does not override these treaties. However, a recent court ruling casts doubt on whether the provision can bypass such obligations.
It is difficult to predict how successful the law will be at pushing countries to repeal widely popular DSTs or enforcement tools for the global minimum tax. Indeed, the uncertainty of how much US taxes a foreigner would pay on investment made in the US may diminish the US role as a reliable and predictable country for business and investment.
