| Update July 14, 2025
The US “One Big Beautiful Bill”, which proposed sweeping international tax reforms including retaliatory tax increases on foreign income, has now passed through Congress. Initially flagged as a concern for Australian taxpayers with US-sourced income, the final version has removed Section 899 following negotiations with the G7, meaning most of the consequences outlined in our article below will not proceed. Changes to the Base Erosion and Anti-Abuse Tax (BEAT) – a US measure aimed at preventing large multinationals from shifting profits out of the US by penalising certain deductible payments to related foreign entities, remain in place. However, the increase is limited to 0.5%, and the proposed reduction in the de minimis threshold appears to have been excluded from the final legislation. |
Key points
- The Bill introduces retaliatory tax increases on specific income categories, with direct implications for Australian taxpayers earning US sourced income
- The Senate version reduces the maximum tax rate increase and introduces delayed enforcement.
- The Bill expands and increases the Base Erosion and Anti-Abuse Tax (BEAT).
On 22 May 2025, the United States (US) House of Representatives (House) passed ‘H.R.1’, known as the “One Big Beautiful Bill” (the Bill). On 16 June 2025, the US Senate released its own version which has some significant changes, including deferral of the proposed start date of some key measures to 2027, namely Section 899.
While the Bill is positioned as a domestic economic reform, if enacted in its current form, its international tax provisions may have significant implications for Australian taxpayers with business interests or investments in the US. Australia will likely be caught under the proposed framework, which means the Bill introduces retaliatory tax rates that could dramatically reduce after-tax returns for affected taxpayers. With the Bill still to pass the US Senate and now in the reconciliation stages of aligning the House and Senate versions, the true impact on Australian taxpayers remains unclear. Taxpayers should nonetheless consider their status under the proposed changes.
How will the bill affect Australian taxpayers?
As at 19 June 2025, the Bill will (if the Senate version is enacted) impose retaliatory tax increases on certain categories of income earned by affected taxpayers. The increase applies to the applicable tax treaty rate, but the maximum rate is capped at 15% above the base statutory rate, which may be higher than the treaty rate. For Australian taxpayers this may include the following federal taxes:
- Tax on effectively connected income (i.e. business income), currently taxed at 21% for entities which are taxed as corporations for US tax purposes.
- Withholding tax on passive investment income such as interest, dividends, and royalties, currently between 5% and 30%.
- Branch profits tax on repatriated income from US branches of foreign entities, currently between 5% and 30%.
- Gains from the disposal of US real property, currently between 15% and 21% depending upon ownership structure.
In each case, the tax is proposed to increase by 5% each year up to the maximum rate (e.g. income that is normally taxed at 21% could, after three years, be taxed at 36%). By contrast, the House version subjects affected taxpayers to a higher cap of 20% above the base rate.
Additionally, both versions of the Bill expand the scope and increase the rate of the Base Erosion and Anti-Abuse Tax (BEAT), in new “Super BEAT” rules.
Example
Liam, an Australian resident, holds shares in a US listed company that declares a dividend of $1,000 in respect of his shares. Prior to the proposed legislation, this dividend would have been subject to a 15% withholding tax under the US-Australia tax treaty, resulting in $150 withheld and a net payment of $850 to Liam. However, under the Bill, the withholding tax on dividends paid to Liam could, after 6 years of operation, increase to 45% (standard statutory rate of 30% + additional tax capped at 15%). This means $450 would be withheld, leaving Liam with only $550 – effectively reducing his after- (US) tax return by $300.
What are the differences between the house and senate versions?
The Senate version of the Bill closely mirrors the original House Bill, with several key modifications. Most notably, it reduces the maximum retaliatory tax rate increase to 15% (down from 20% in the House version) above the statutory rate. It also introduces a delayed enforcement mechanism, with the earliest application being the later of: one year after enactment (compared to 90 days in the House version), 180 days after the introduction of an unfair tax, or the first date the unfair tax applies.
Both versions of the Bill target countries that are deemed to implement “unfair foreign tax” policies. The House version applies to so-called “Discriminatory Foreign Countries” and explicitly identifies the digital service tax (DST), undertaxed profits rule (UTPR) and diverted profits tax (DPT) as being unfair in this context. By contrast, the Senate version relies on action by US Treasury to apply some aspects of the rules. It also distinguishes between those with extraterritorial tax regimes (which apply beyond a country’s borders, such as the UTPR) and those with discriminatory taxes (which apply unfairly to foreign entities, such as a DPT) (offending foreign countries). The rules apply differently depending on the classification.
Why are Australian investors affected?
Australia is expected to be caught under the provisions due to its adoption of: (1) the DPT and multi-national anti-avoidance tax (MAAL), which have been in effect since 2018, and (2) the UTPR (as part of the OECD’s Pillar Two reforms), which commenced on 1 January 2025. Although the MAAL is not explicitly named in the Bill, it is conceptually aligned with the DPT and UTPR in that it targets base erosion and profit shifting by multinationals. In addition, several other areas seem likely to draw US Treasury scrutiny, including Australia’s treatment of royalties, the News Bargaining Incentive, and large penalties for Significant Global Entities.
Can Australia do anything to avoid the taxes?
While the classification of a country for the purposes of the Bill is ultimately a matter of US domestic law, the continued application of rules such as the MAAL, DPT, and UTPR by the Australian Federal Government may warrant evaluation to determine whether these measures remain proportionate and effective in achieving their intended policy objectives in the current context if it will mean that punitive taxes will be applied to Australian taxpayers.
What are the implications for the BEAT regime?
The BEAT is a US tax designed to prevent large corporations from shifting profits overseas by making deductible payments to related foreign entities. Traditionally, it only applied to very large multinationals. However, under the Bill, any company that is more than 50% owned (directly or indirectly) by individuals or entities from affected countries will automatically fall under BEAT, regardless of their size or structure. The BEAT rate will increase from 10% to 12.5% (up to 14% in the Senate version), and companies can no longer use tax credits to reduce this liability. Additionally, certain capitalised expenses will now count as deductions, potentially increasing the tax burden. These changes significantly broaden who is affected and make the tax more aggressive, so it’s important to assess whether any part of a group structure could trigger BEAT exposure.
What is the current status of the bill?
There are currently two competing versions of the Bill, being the House version and the Senate version. Both versions will need to be identical in order to be presented to President Trump for his approval.
The Bill may undergo many more changes in its journey through the House and Senate. It may not pass. If it does pass, and Australia is identified as a country with tax practices which are subject to the Bill, it will place pressure on the Australian Federal Government to repeal its own laws so that Australia is not an ‘offending’ or ‘discriminatory’ foreign country. However, as matters stand today, the potential impact of this Bill is certainly something that Australian taxpayers with US interests should keep a close eye on.
Can Australian investors get a compensating tax offset?
Generally, Australian taxpayers who pay foreign income tax on amounts that are also taxed in Australia may be eligible for a non-refundable Foreign Income Tax Offset (“FITO”), to provide relief against double taxation. In principle, taxes paid under the Bill should qualify for a FITO (subject to the usual limitations and restrictions). However, eligibility for a FITO is predicated on the underlying tax being imposed consistently with the relevant tax treaty. In this case, since it is the regulatory framework of the US that is giving rise to the additional tax in a way that effectively ‘overrides’ the treaty, it is unclear whether a FITO would be available. If the measure is passed, it will be essential that the Australian Commissioner of Taxation or indeed the Australian Government provide certainty on whether a FITO is available.
What are the next steps?
For further insights, explore additional resources from our global network of Baker Tilly International Limited (see here). Clients should contact their Pitcher Partners representative to review their existing arrangements and determine what action may be required in light of the potential changes
As of 27 June 2025, the US Treasury Secretary has asked for Section 899 to be removed from consideration in the Bill, following ongoing discussions with G7 allies to exclude US companies from certain taxes imposed by those countries. We will continue to monitor the bill for further developments.
