OBBB Makes Sweeping Changes to International Tax

On July 4, President Donald Trump signed the new tax and budget law, also known as the One Big Beautiful Bill (OBBB), into law, permanently extending, with modifications, many expiring tax provisions enacted by the Tax Cuts and Jobs Act of 2017. The legislation is a significant overhaul of international tax provisions, including comprehensive changes to the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), base erosion and anti-abuse tax (BEAT), Subpart F, and foreign tax credit (FTC) regimes. Notably, the previously proposed retaliatory tax provisions under Section 899 were removed from the final bill.

Following is a summary of key changes to the international tax provisions included in the final legislation. Unless otherwise specified, these changes generally will be effective from tax years beginning after Dec. 31, 2025.

Net CFC tested income (formerly GILTI)

The new law renames the GILTI regime to net CFC tested income (NCTI) and includes a number of changes to the GILTI regime:

• The Section 250 deduction rate for NCTI permanently is reduced to 40% from the current 50%, resulting in a 12.6% effective tax rate (ETR) under the 21% corporate tax rate (without regard to FTC). Foreign income taxes on NCTI at an ETR of 14% or more would eliminate U.S. residual tax liability on inclusion (considering the revised 90% FTC limitation).
• The net deemed tangible income return, previously calculated as 10% of qualified business asset investment (QBAI), has been removed from the GILTI calculation, expanding the tax base subject to inclusion under NCTI.
• In contrast to the broader tax base as a result of the removal of the net deemed tangible income return, the FTC rules for NCTI enhance credit usage and ease the tax burden.
  • For instance, the Section 250 deduction, certain taxes imposed on NCTI, and other expenses directly allocable to NCTI are allocated and apportioned to the NCTI category for FTC limitation purposes while all other expenses, including interest and research and experimental (R&E) expenses, are not allocable to this category.
• The deemed paid credit applied to the FTC associated with NCTI is increased from 80% to 90% of foreign income taxes paid or accrued on tested income.
• Foreign taxes on distributions of previously taxed NCTI earnings also are subject to the same 90% limitation for distributions made after June 28, 2025.

Crowe observation

Because the revisions to GILTI included in the new NCTI regime include a mix of taxpayer-favorable and taxpayer-unfavorable changes, the overall NCTI will impact taxpayers differently depending on the specific facts and circumstances.

FDDEI deduction (formerly FDII deduction)

The new law renames the FDII deduction to the foreign-derived deduction eligible income (FDDEI) deduction and simplifies the rules so the deduction applies directly to FDDEI. As part of these changes, the legislation made the following key modifications to the FDDEI:

• The deemed tangible income return, 10% of QBAI, no longer is operative in reducing the base eligible for the deduction.
• The Section 250 deduction rate for FDDEI permanently is reduced from the current 37.5% to 33.34%, resulting in a 14% ETR, which is less than the 21% corporate tax rate and aligns with the ETR applicable to NCTI.
• Interest and R&E expenses are expressly excluded from the category of expenses taken into account when determining deduction-eligible income (DEI), thereby preserving a greater base eligible for the FDDEI deduction.
• Gains from the sale or disposition of intangible property (including transfers subject to Section 367(d)) and any other property subject to depreciation, amortization, or depletion by the seller) are excluded from DEI. This exclusion applies retroactively to transactions occurring after June 16, 2025.

Crowe observation

Despite the reduced Section 250 deduction rate and the narrower scope of DEI, the FDDEI deduction’s direct application to FDDEI and the broader base could enhance tax benefits for taxpayers, particularly U.S. exporters with substantial domestic capital investment or overhead.

BEAT

The BEAT rate on modified taxable income is permanently set at 10.5%, replacing the current 10% rate and eliminating the scheduled increase of 12.5% after tax year 2025. A 1% higher rate for banks and securities dealers is retained, resulting in an 11.5% rate for those institutions. The use of the research credit and certain specified credits to offset BEAT liability is permanently permitted. All other BEAT provisions generally remain unchanged.

Other international tax changes

Other international tax provisions in the legislation include:

• For FTC limitation purposes, up to a maximum of 50% of income from sales of inventory manufactured within the U.S. and sold abroad through a foreign branch or fixed places of business is treated as foreign source income.
• The look-through rule under Section 954(c)(6), which allows certain intercompany payments from active earnings between controlled foreign corporations (CFCs) to be excluded from Subpart F income, is made permanent.
• The “last day” rule under Section 951(a)(1), which requires U.S. shareholders to include Subpart F and NCTI from a CFC in income if the shareholder owns the CFC stock at any point during the year, is repealed.
• The one-month deferral election under Section 898, which requires specified foreign corporations to adopt the majority U.S. shareholder’s tax year for tax years beginning after Nov. 30, 2025, is repealed.
• The limitation on downward attribution of stock ownership under Section 958(b)(4) is restored in applying the constructive ownership rules from foreign persons to U.S. persons for purposes of determining CFC status in foreign-parented groups. To address potential gaps, under the new Section 951B, foreign-controlled U.S. shareholders remain subject to Subpart F and NCTI inclusion when direct or indirect ownership and deferral potential of decontrolling transactions exist.

Looking ahead

The OBBB’s changes to NCTI, FDDEI, BEAT, FTC, and other international tax provisions will significantly alter compliance requirements and strategic tax planning for multinational corporations. Guidance and tax form changes to implement the new law are expected in the coming months. Taxpayers should consult their tax advisers to evaluate the practical implications of the new framework for tax years 2025 and beyond.