Overview

The Senate is currently considering the “One Big Beautiful Bill Act.” The House version of that act would add a new section 899 to the Internal Revenue Act. Section 899 would attempt to retaliate for “unfair” foreign taxes through a two–prong approach. First, by imposing additional taxes and withholding on certain income streams for investors, and second through adoption of an enhanced Base Erosion and Anti–Abuse Tax (BEAT). It is this first prong that we focus on in this report. First, we need to be up front and recognize that we are not tax professionals. Therefore, we will not opine on the particulars of tax proposals. Nor do we have any specialized expertise with respect to existing tax rules. Investors would be well–advised to consult with tax specialists. We are, however, experts on what indentures say. We will speak generally about how the Section 899 changes to tax withholding rules could impact a set of bonds issued by U.S. companies that include “Additional Amount” concepts – turning a bill that is aimed at “unfair foreign tax” into something that could make U.S. corporations pay more to service their debt.

The “Additional Amount” Concept

Issuers make a fundamental promise to investors that interest and principal will be paid in a timely fashion in the amounts expected. Often, issuers include a related promise – that those payments will be made free from tax withholding or deduction. The majority of regular way bond deals do not include this requirement to pay additional amounts, but it exists in a significant amount of cross-border marketed U.S. deals. More specifically, issuers promise that if there is a change in tax law by a relevant taxing authority that requires withholding or deduction from those expected payment streams, then the Issuer promises to “gross up” the investor.