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Legislative bills

U.S. House of Representatives Passes One Big Beautiful Bill Act (OBBBA) to Counteract Global Minimum Tax and Digital Services Tax Initiatives

Strategic Insights

— 3 min read

The U.S. House of Representatives has passed the One Big Beautiful Bill Act (OBBBA), which includes a proposal to impose additional U.S. withholding taxes on payments made to countries that have implemented the OECD's base erosion and profit shifting (BEPS) initiatives, including Canada's digital services tax and global minimum tax. Section 899 of the OBBBA aims to target countries that have enacted unfair foreign taxes, including the digital services tax and the Undertaxed Profits Rule (UTPR). The proposed withholding tax will increase by 5% for each year a country imposes an unfair foreign tax, with a maximum additional withholding rate of 20% above the U.S. statutory rate.

The OBBBA's Section 899 has significant implications for Canadian investors, as it could result in a doubling or tripling of their U.S. withholding tax burden in the short term and up to a tenfold increase in the long term. The digital services tax (DST) and UTPR have been implemented by Canada in line with the OECD's BEPS 2.0 initiatives, which aim to address the challenges posed by multinationals and large enterprises taking advantage of digitalization.

The OECD's BEPS 2.0 has two pillars: Pillar 1 targets the challenges posed by large enterprises taking advantage of the digitalization of the global economy, while Pillar 2 proposes a global minimum tax to ensure that large multinationals pay a minimum effective tax rate of at least 15% on worldwide income. Pillar 2 is limited to multinational enterprises with annual global revenue in excess of €750 million, with exemptions for certain entities such as government entities and non-profits.

The digital services tax (DST) is a 3% tax on Canadian-source digital services revenue earned by large domestic and foreign taxpayers from Canadian consumers. The DST is levied on the amount by which the Canadian digital services revenue for the particular calendar year exceeds CAD $20 million. The DST applies retroactively to January 1, 2022.

Key Takeaways:

  • The U.S. House of Representatives has passed the One Big Beautiful Bill Act (OBBBA), which includes a proposal to impose additional U.S. withholding taxes on payments made to countries that have implemented the OECD's BEPS initiatives.
  • Section 899 of the OBBBA aims to target countries that have enacted unfair foreign taxes, including Canada's digital services tax and global minimum tax.
  • The proposed withholding tax will increase by 5% for each year a country imposes an unfair foreign tax, with a maximum additional withholding rate of 20% above the U.S. statutory rate.
  • The OBBBA's Section 899 has significant implications for Canadian investors, as it could result in a doubling or tripling of their U.S. withholding tax burden in the short term and up to a tenfold increase in the long term.
  • Canada has implemented the digital services tax (DST) and global minimum tax in line with the OECD's BEPS 2.0 initiatives.
  • The digital services tax (DST) is a 3% tax on Canadian-source digital services revenue earned by large domestic and foreign taxpayers from Canadian consumers.
  • The DST applies retroactively to January 1, 2022, and levies a 3% tax on the amount by which the Canadian digital services revenue for the particular calendar year exceeds CAD $20 million.
  • The OECD's BEPS 2.0 initiatives have two pillars: Pillar 1 targets the challenges posed by large enterprises taking advantage of the digitalization of the global economy, while Pillar 2 proposes a global minimum tax to ensure that large multinationals pay a minimum effective tax rate of at least 15% on worldwide income.

Statistics:

  • The proposed withholding tax will increase by 5% for each year a country imposes an unfair foreign tax, with a maximum additional withholding rate of 20% above the U.S. statutory rate.
  • The U.S. withholding tax rate on dividends payable by a U.S. corporation to its sole Canadian corporate shareholder is currently 5%.
  • The DST applies retroactively to January 1, 2022, and levies a 3% tax on the amount by which the Canadian digital services revenue for the particular calendar year exceeds CAD $20 million.
  • The DST has significant implications for Canadian investors, as it could result in a doubling or tripling of their U.S. withholding tax burden in the short term and up to a tenfold increase in the long term.

Sources:

  • Mondaq Ltd, 2025 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com
  • OECD, BEPS 2.0 initiatives
  • Canadian Revenue Agency, Digital Services Tax (DST) requirements
  • U.S. Internal Revenue Service, Section 899 of the One Big Beautiful Bill Act (OBBBA)

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