Alert

Numerous adjustments to international tax provisions have resulted from the passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. These changes primarily involve adjustments to tax rates, along with some nuanced revisions to calculation methods and reporting requirements.

Key Observations for International Tax

This legislation introduces several critical changes for taxpayers with operations abroad and US entities with foreign parents.

Operations Through Controlled Foreign Corporations Became Incrementally More Expensive for Most

The new law made several changes to the regime formerly known as Global Intangible Low-Taxed Income (GILTI), including renaming it to Net Controlled Foreign Corporations (CFC) Tested Income (NCTI), effective for tax years beginning after December 31, 2025. For applicable domestic C corporations and individuals who elect under the Internal Revenue Code (IRC) Section 962 to be treated as a corporation, the Section 250 deduction has been reduced from 50% to 40%.

Additionally, the haircut on the foreign tax credits attributable to the inclusion (i.e., the Section 960 credit) has been reduced from 20% to 10%. Overall, these changes result in an approximate effective tax rate of 14% compared to the historic 13.125%.

For the calculation of net deemed tangible return (NTDR), there were two changes. First, the NTDR deduction, which permitted taxpayers to deduct an additional 10% of qualified business asset investment (QBAI), was eliminated. Second, the increased Section 163(j) limitation—such as applying the 30% limitation to EBITDA, rather than EBIT—will permit taxpayers to utilize more interest expense to reduce NCTI inclusions.

For all applicable taxpayers, deductions allocable to NCTI for foreign tax credit purposes will be limited to only those directly allocable to the income. Note that directly allocable was not specifically defined in the new code sections and treasury regulations are expected to provide further clarity.

Other expenses, such as interest and research and experimentation (R&E), which were previously required by statute to be allocated the NCTI, will now be allocated exclusively to US source income for the calculation of the foreign tax credit limitation.

For all taxpayers, the foreign tax credit for taxes paid in association with distributions made after June 28, 2025, of previously taxed earnings and profits (PTEP) related to NCTI will be limited to 90%.

Certain Foreign Sales Benefits Were Reduced

After the Tax Cuts and Jobs Act (TCJA) of 2017, domestic corporations benefitted from the Foreign-Derived Intangible Income (FDII) deduction, which permitted a 37.5% deduction for certain foreign sales, resulting in an effective tax rate of 13.125% on eligible sales. The OBBBA reduces the deduction rate to 33.34% and, similar to the changes made to NTCI, eliminates the NTDR and limits the application of any expenses not directly allocable to eligible income.

The result of these changes is that FDII eligible sales will now be taxed at an effective rate of approximately 14%, maintaining parity with the effective tax rate of NCTI. Like NCTI, the OBBBA renamed the FDII deduction as Foreign-Derived Deduction Eligible Income (FDDEI). The new FDDEI rules will be applicable for tax years beginning after December 31, 2025.

The new law will also limit the application of FDDEI with regard to disposition or transfer of intangible property and certain other property subject to depreciation, amortization, or depletion by the seller. These rules will be retroactive to June 16, 2025, and may limit some outbound planning opportunities for taxpayers.

Beyond the FDDEI changes, the new law provides a new benefit for taxpayers selling US-produced inventory for foreign use and sold abroad through a fixed place of business outside of the US. In such cases, the new law permits 50% of the income from these sales to be foreign source income and, thus, is expected to allow for greater utilization of foreign tax credits.

Minimal Changes to Base Erosion and Anti-Abuse Tax

With the current base erosion and anti-abuse tax (BEAT) guidelines, certain domestic corporations with 3-year average gross receipts in excess of $500 million USD and a base erosion percentage greater than 3%, or 2% for certain taxpayers including banks and registered securities dealers, are subject to a 10% surcharge tax on adjusted taxable income. The base erosion percentage is determined as the amount of certain payments made to foreign related parties over the sum of allocable deductions.

The new law changes the surcharge rate to 10.5% for tax years beginning after December 31, 2025, and permanently maintains certain applicable credits for calculation purposes.

Potentially Simplified Reporting

Perhaps most welcomed, the new law has reinstated Section 958(b)(4)’s limitation on downward attribution for tax years beginning after December 31, 2025. The limitation prevents stock owned by a foreign person from being attributed downward to a US person. The removal of Section 958(b)(4) as part of TCJA often created surprising results and additional, significant compliance obligations for taxpayers. However, the new law also adds Section 951B, which will still permit the application of downward attribution in certain circumstances.

Subpart F Provisions

The new law permanently extends Section 954(c)(6) look-through exception to Subpart F income inclusions for certain income received by a CFC from a related CFC. This benefits taxpayers by allowing for more efficient intercompany financing and reinvestment of active earnings from one CFC to another without triggering current taxation at the highest applicable rates under Subpart F.

Additionally, the new law better aligns the economics of sales CFC stock between US shareholders by allocating any Subpart F and NCTI to the US shareholders based on the days the stock was held, rather than exclusively burdening the buyer with the inclusions. This rule will apply to tax years of foreign corporations beginning after December 31, 2025.

Next Steps for Businesses and Individuals

You should consult with your tax advisors to understand the implications of these changes and assess the impact on current and future tax planning. Particularly, these updates should be considered by businesses anticipating future international expansion or acquisitions.

We’re Here to Help

For more information on how these provisions may affect your business or personal taxes, contact your firm professional.

Additional Resources

• International Tax Practice
• Tax Planning Individual Services