Overview
The One Big Beautiful Bill Act (OBBB), signed into law by President Trump on July 4, makes several important changes to the US international tax rules while maintaining the basic framework enacted in the 2017 legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA).
In light of the shared understanding between G-7 countries that the Pillar 2 undertaxed profits rule and income inclusion rule should not apply to US-parented groups, the OBBB does not include the proposed section 899 retaliatory tax provision that would have imposed higher US taxes on certain foreign persons resident in countries with taxes considered extraterritorial or discriminatory. Foreign persons and governments with US investments should monitor the implementation of the shared understanding, mindful that, as noted in a joint statement by Finance Committee Chairman Crapo and Ways and Means Chairman Smith, section 899 could re-appear in future legislation.
As under current law, the OBBB continues reduced tax rates (compared to the 21% US corporate tax rate) on certain foreign income derived by controlled foreign corporations (CFCs) or US corporations. The OBBB makes permanent a 40% deduction for active foreign income of CFCs (currently referred to as global intangible low-taxed income (GILTI) and renamed net CFC tested income as discussed below), generally resulting in a 12.6% US tax rate. The OBBB also makes permanent a 33.34% deduction for certain foreign-derived income of US corporations (currently referred to as foreign-derived intangible income (FDII) and renamed foreign-derived deduction eligible income), generally resulting in a 14% rate. The OBBB eliminates the reduction for a deemed return on tangible assets in both regimes. The OBBB also makes changes to the expense allocation rules relevant to the net CFC tested income and foreign-derived deduction eligible income calculations, as well as several foreign tax credit limitation modifications. In addition, the OBBB makes permanent the "CFC look-through rule," modifies the rules for determining a US shareholder’s pro rata share of CFC income, and reinstates the limitation on downward attribution of stock ownership in former section 958(b)(4). It also imposes a new 1% excise tax on certain remittance transfers.
The OBBB also does not contain the more significant changes to the base erosion anti-abuse tax (BEAT) in recent proposals but increases the BEAT rate from 10% to 10.5% while the permanently retaining the current favorable treatment of research and certain other credits in calculating BEAT liability.
GILTI and FDII Changes
Background
The OBBB makes several changes to what are currently referred to as the GILTI and FDII regimes. US shareholders of CFCs are taxed currently on two types of CFC income: subpart F income (generally passive income) and GILTI. GILTI is currently taxed at a rate of 10.5% by means of a 50% deduction under section 250. GILTI is generally calculated by reference to the active income earned by the CFC ("tested income"), minus a deemed 10% return on investment in tangible business assets ("deemed tangible income return" or "DTIR"). US corporations may take a foreign tax credit for taxes properly attributable to tested income, haircut by 20%.
The GILTI regime was originally conceived of as a minimum tax on CFC intangible income from serving foreign markets, and the TCJA legislative history indicates that Congress viewed GILTI as a form of a minimum tax, under which additional US tax would not be imposed where income was subject to a foreign tax rate of 13.125% (which, when haircut by 20%, would equal the 10.5% US effective tax rate on GILTI). However, because the expense allocation rules apply to determine the GILTI foreign tax credit limitation, in practice the foreign tax rate must be higher than 13.125% to avoid residual US tax.
The FDII regime provides a reduced tax rate for certain foreign-derived income earned by US corporations, in part to avoid creating an incentive for US corporations to serve foreign markets through CFCs. FDII is currently taxed at a rate of 13.125% by means of a 37.5% deduction under section 250. A domestic corporation's FDII is currently calculated as "deemed intangible income" (DII) multiplied by the ratio of foreign-derived deduction eligible income (FDDEI) over deduction eligible income (DEI) of such corporation. DII is calculated as DEI, minus a reduction for a US corporation's DTIR, minus allocable deductions.
Reduced, But Permanent, GILTI and FDII Deductions
The OBBB modifies the rates applicable to what is now referred to as GILTI (renamed net CFC tested income) and FDII (renamed foreign-derived deduction eligible income). Effective for taxable years beginning after December 31, 2025, the OBBB would make permanent a 40% net CFC tested income deduction (resulting in a 12.6% US tax rate and, considering the foreign tax credit change discussed below, generally requiring a 14% foreign tax rate for no residual US tax to arise) and a 33.34% foreign-derived deduction eligible income (resulting in a 14% rate). Under pre-OBBB law, the deductions related to GILTI and FDII were scheduled to be reduced for tax years beginning after December 31, 2025, such that the GILTI deduction would decrease from 50% to 37.5% (resulting in a 13.125% rate for GILTI), and the FDII deduction would be reduced from 37.5% to 21.875% (resulting in a 16.406% rate for FDII).
Elimination of Allowance for Deemed Tangible Return
When the TCJA was enacted, the reduction for DTIR was viewed as a "normal return" on tangible assets, such that the balance of a CFC’s income should be viewed as income attributable to intangible property. In practice, some multinational groups, such as those with CFCs in service businesses or with tangible assets that had already been significantly depreciated, have only a small reduction in their GILTI resulting from the subtraction of DTIR. Some also argued that the subtraction of DTIR in calculating GILTI provided an incentive for companies to shift operations aboard. On the other hand, because DTIR also reduces the FDII benefit for domestic corporations, the concept arguably provided a disincentive for US companies to invest in US business assets.
For taxable years beginning after December 31, 2025, the OBBB eliminates the deemed return on investment in tangible business assets from both regimes. GILTI is renamed "net CFC tested income, while FDII is renamed "foreign-derived deduction eligible income."
GILTI Foreign Tax Credit Modifications
As mentioned above, under current law, expense allocation rules apply to determine the GILTI foreign tax credit limitation. The OBBB limits the types of expenses that are allocated to the net CFC tested income basket for purposes of determining the foreign tax credit limitation. Specifically, only the section 250 deduction for net CFC tested income and the attributable section 78 gross-up (along with any deduction for section 164(a)(3) taxes) and any "directly allocable" deduction will be allocated. The statute explicitly states that no amount of interest expense or R&E expenses will be allocated. Any amount that would otherwise have been allocated to the net CFC tested income basket will instead be allocated only to US-source income (i.e., it will not be allocated to one of the other foreign credit baskets). These changes apply to taxable years beginning after December 31, 2025.
The OBBB also reduces to 10% (from 20%) the haircut on taxes attributable to tested income, so that 90% of tested income foreign taxes are taken into account, effective for taxable years beginning after December 31, 2025. The OBBB also adds a new 10% haircut on foreign tax credits with respect to distributions of previously-taxed net CFC tested income (but not subpart F income). This new limitation applies to amounts distributed after June 28, 2025.
The OBBB does not modify the lack of a carryover for foreign taxes in the net CFC tested income basket.
FDII Changes
The OBBB modifies the definition of DEI, on which the foreign-derived deduction eligible income calculation is based, adding a new exclusion for any income and gain from the sale or other disposition (including pursuant to a transaction subject to section 367(d)) of any intangible property and any other property subject to depreciation, amortization, or depletion by the seller. The modification is effective for sales or other dispositions occurring after June 16, 2025.
The OBBB also changes the rules for allocating deductions to DEI, so that while "properly allocable" deductions continue to reduce gross income to arrive at DEI, interest expense and R&E expenditures do not, effective for taxable years beginning after December 31, 2025. This change, along with the permanent 33.34% deduction and elimination of the subtraction of the DTIR, should increase the attractiveness of the foreign-derived deduction eligible income regime for some US multinationals, though the potential application of the BEAT and corporate alternative minimum tax (CAMT) must also be considered.
Other Changes Affecting Multinational Groups
Modifications to Pro Rata Share Rules
Pre-OBBB law provides that a US shareholder who owns stock in a foreign corporation on the last day in such year in which the foreign corporation is a CFC must include in gross income for the US shareholder's taxable year in which or with which such taxable year of the foreign corporation ends the US shareholder's pro rata share of the foreign corporation's subpart F income for such year. In determining the pro rata share, a US shareholder’s subpart F inclusion is based on the amount of the CFC’s subpart F income that would have been distributed to the US shareholder, but reduced (1) for the portion of the year during which the foreign corporation was not a CFC and (2) for any dividends paid to any other person on the stock the US shareholder owns (directly or indirectly), but only to the extent of the subpart F income allocable to those shares and the portion of the CFC's taxable year during which the US shareholder did not own the shares. Similar pro rata share rules apply in the calculation of a US shareholder’s GILTI inclusion.
Under the OBBB, if a foreign corporation is a CFC at any time during a taxable year of the foreign corporation (a "CFC year"), each US shareholder that owns stock in such corporation during the CFC year must include in gross income such shareholder's pro rata share of the corporation's subpart F income for the CFC year. The US shareholder’s pro rata share of a CFC's subpart F income for a CFC year is the portion of such income that is "attributable to" (1) the stock of the corporation owned by the shareholder, and (2) any period of the CFC year during which the shareholder owned the stock, the shareholder was a US shareholder, and the corporation was a CFC. Similar modified pro rata share rules would apply in the calculation of a US shareholder's GILTI inclusion. The revisions generally apply to taxable years of foreign corporations beginning after December 31, 2025, subject to a transition rule for dividends.
The statute provides Treasury and the IRS with authority to provide guidance on the new rules, which will be important to define income "attributable to" stock in the relevant period. This may include guidance allowing or requiring taxpayers to elect to close the taxable year of a CFC upon a disposition.
The OBBB modifications are likely motivated by potential double non-inclusion situations arising under current law due to the interaction of section 951(a) pro rata share rules and section 245A dividends-received deduction. Some of these issues were addressed in the "extraordinary reduction" regulations of Treas. Reg. § 1.245A-5.
Restoration of Limitation on Downward Attribution
When determining US shareholder or CFC status, section 958 applies the constructive ownership rules of section 318(a), with certain modifications. Section 318(a)(3) provides rules for when a corporation, partnership, trust, or estate is considered to own stock owned by a shareholder, partner, or beneficiary (“downward attribution”). Before the TCJA repealed section 958(b)(4), stock owned by a foreign person was not attributed downward to a US person. Following the repeal of section 958(b)(4), lower-tier domestic entities could cause foreign corporations in a multinational group to be treated as CFCs, even where no US shareholders had a direct or indirect interest in the foreign corporation.
The legislative history to the TCJA indicates that the repeal of section 958(b)(4) was intended to apply only in limited situations involving "de-controlling transactions" that were used as a means of avoiding the subpart F provisions. However, despite statements in the legislative history indicating that Congress intended to limit the scope of section 958(b)(4) repeal, section 958(b)(4) was simply stricken from the code. The lack of a limitation on downward attribution from foreign to US persons can have far-reaching effects, expanding the scope of US shareholder and CFC status, including in situations quite different from those discussed in the legislative history. Although Treasury and the IRS addressed some unintended consequences in regulations, many issues remained.
The OBBB prospectively restores the limitation on downward attribution of stock ownership in former section 958(b)(4) when applying the constructive ownership rules in section 318(a)(3). Presumably in order to address the types of transactions that section 958(b)(4) repeal was intended to reach, the OBBB adds new section 951B, which applies the CFC inclusion rules to a “foreign controlled US shareholder” of a “foreign controlled foreign corporation” as if the former were a US shareholder and the latter were a CFC. A foreign controlled US shareholder is a US person that would be a US shareholder with respect to a foreign corporation if (1) section 951(b) were applied using an ownership threshold of more than 50% (rather than 10% or more), and (2) downward attribution from foreign persons applies.
The downward attribution-related changes apply to taxable years of foreign corporations beginning after December 31, 2025, and the legislation states that the amendments should not be construed to create any inference with respect to the application of the rules prior to the effective date.
Permanent Extension of Look-Through Rule
The OBBB permanently extends the CFC look-through rule of section 954(c)(6). Section 954(c)(6) excludes from foreign personal holding company income (and therefore from subpart F income) dividends, interest, rents and royalties received or accrued by one CFC from a related CFC to the extent attributable or properly allocable to income of the payor which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. The CFC look-through rule, which is critical to the ability of many US multinationals to redeploy earnings from active operations, has in recent years been regularly temporarily extended by Congress (sometimes retroactively) and had been set to expire for taxable years beginning January 1, 2026.
Repeal of Election for One-Month Deferral in Determination of Specified Foreign Corporation Taxable Year
Specified foreign corporations are generally required to use as a taxable year the taxable year of their majority US shareholder, subject to the section 898(c) election of a taxable year beginning one month earlier than the majority US shareholder year. In some cases, the election provided tax planning opportunities. The OBBB repeals the one-month deferral rule for taxable years of specified foreign corporations beginning after November 30, 2025, subject to a transition rule providing for a short year the first year beginning after November 30. The statute specifically instructs the IRS to issue guidance for allocating foreign taxes that are paid or accrued in such first taxable year and the succeeding taxable year. Taxpayers affected by the repeal of the section 898(c) election should review the effects of potential approaches and consider providing input on the guidance.
Sourcing Certain Income from Sale of Inventory Produced in the United States
Section 863 sources income from the sale of inventory property produced by the taxpayer by reference to the production activities with respect to such property. The OBBB provides a new sourcing rule that applies solely for purposes of the foreign tax credit limitation. Under this rule, if a US person maintains an office or other fixed place of business in a foreign country, the portion of taxable income from the sale outside the United States of inventory property produced in the United States and that is attributable to such foreign office (determined under rules similar to the rules of section 864(c)(5)) is treated as foreign source income, up to 50% of the income from the sale of the inventory property. The change should mitigate potential double taxation issues that can arise under current law where a taxpayer’s foreign branch distributes property produced in the United States. Under pre-OBBB law, the income from such activities would generally be put in the foreign branch basket, but, due to the sourcing rule, would be treated as US-source income and thus would give rise to no foreign tax credit (in the absence of treaty re-sourcing or competent authority agreement).
Correction of Assignment of Foreign Taxes Attributable to Base Differences
The OBBB corrects an apparent TCJA drafting error, amending section 904(d)(2)(H)(i) to assign foreign taxes on amounts that do not constitute income under US tax principles to the general basket, effective for taxable years beginning after December 31, 2025. Pre-OBBB section 904(d)(2)(H)(i) states that such taxes are assigned to section 904(d)(1)(B), the foreign branch income basket. This cross-reference was likely intended to reference the general category basket now contained in section 904(d)(1)(D) but previously contained in section 904(d)(1)(B). However, Treasury and the IRS determined in regulations that the statute was clear and issued regulations providing that taxes associated with base differences are assigned solely to the foreign branch category. The OBBB also makes other corrections related to unsubstantiated 10/50 dividends and US-source income derived with respect to certain foreign subsidiaries.
Modification of Limitation on Business Interest Expense
The TCJA amended section 163(j), which now generally limits the amount of interest expense that a business can deduct to 30% of adjusted taxable income (ATI) plus business interest income. Treasury regulations provide that the section 163(j) limitation applies to CFCs, with certain modifications, and CFC income inclusions may be considered in a US shareholder’s ATI calculations in certain situations.
For tax years beginning before January 1, 2022, ATI was computed without regard to depreciation, amortization, or depletion deductions. For tax years beginning after December 31, 2021, however, ATI was computed by deducting depreciation, amortization, and depletion expense, resulting in reduced ATI and therefore a reduced interest expense deduction under section 163(j). The OBBB reverts to the more taxpayer-favorable approach of calculating ATI without regard to depreciation, amortization, or depletion deductions, effective for taxable years beginning after December 31, 2024.
The OBBB also modifies the calculation of ATI to subtract subpart F income, CFC net tested income, and section 78 gross ups, effective for taxable years beginning after December 31, 2025. This change will result in a lower available interest deduction for US corporations with CFC income inclusions.
In addition, the OBBB will treat certain capitalized interest expense as business interest expense that is subject to the section 163(j) limitation, effective for taxable years beginning after December 31, 2025.
BEAT Modifications
The BEAT imposes an additional tax on "applicable taxpayers" to the extent that 10% of modified taxable income (MTI) exceeds the sum of the taxpayer’s regular tax liability and tax credits other than the section 41(a) research credit and a portion of "applicable section 38 credits." MTI generally means taxable income without regard to certain tax benefits from "base erosion payments" made to foreign related parties. Under pre-OBBB law, for tax years beginning after December 31, 2025, the rate applied to MTI was scheduled to increase from 10% to 12.5% and the favorable carve-out of research and certain other credits were to be eliminated.
While the original Senate bill text would have made a number of significant changes to the BEAT regime (including a high-tax exception, reducing the base erosion percentage threshold for determining applicable taxpayer status, and treating capitalized interest as a base erosion payment), the enacted OBBB makes only a few modifications, effective for taxable years beginning after December 31, 2025. The BEAT rate will increase to 10.5%, while the favorable treatment of research and certain other credits will be permanently retained.
Excise Tax on Certain Remittance Transfers
The OBBB imposes a 1% remittance tax on any electronic transfer of funds requested by a sender located in the United States (including US territories and possessions) to a recipient located outside the United States and initiated by a remittance transfer provider (defined by reference to the Electronic Fund Transfer Act). The 1% excise tax would be payable by the sender of the remittance transfer and collected and remitted to the IRS by the remittance transfer provider on a quarterly basis. The remittance transfer provider owes the tax if the tax is not collected from the sender.
The OBBB provides that the excise tax would apply to any remittance transfer for which the sender provides cash, a money order, a cashier’s check, or any similar physical instrument (to be determined by the US Treasury), subject to two exceptions. First, the excise tax does not apply to any remittance transfer for which the funds being transferred are withdrawn from an account held in or by a financial institution that is a bank insured by the Federal Deposit Insurance Corporation, a commercial bank or trust company, a private banker, an agency or branch of a foreign bank in the United States, a credit union, a broker or dealer registered with the Securities and Exchange Commission, or a broker or dealer in securities or commodities, provided that such financial institution is subject to certain laws that impose requirements on US-regulated financial institutions (specifically, subchapter II of chapter 53 of title 31 of the United States Code). Second, remittance transfers using a US-issued debit or credit card would not be subject to the excise tax.
The OBBB as enacted does not contain exceptions, as in prior versions of the proposal, for senders who are verified US citizens or nationals. The final version also does not include a tax credit for the sender.
The OBBB also refers to section 7701(l), which provides that the Secretary may prescribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among any two or more of such parties where such recharacterization is appropriate to prevent avoidance of tax. The new excise tax rules state that, for purposes of section 7701(l), with respect to any multiple-party arrangements involving the sender, a remittance transfer shall be treated as a financing transaction.
Looking Forward
Now that the OBBB is signed into law, taxpayers should consider the effects of the international tax changes on their cross-border operations. For example, the changes to the foreign-derived deduction eligible income rules may make it more advantageous to conduct additional operations from, and hold additional assets in the United States. In addition, as Treasury and the IRS work on guidance and regulations to implement the legislation, taxpayers should consider seeking guidance on key issues.
