The essential OBBB international tax provisions in a nutshell
The One Big Beautiful Bill Act (OBBB), President Trump’s signature tax and domestic policy bill, recently passed the House and Senate to become law. What does this mean from an international tax perspective?
The OBBB permanently codifies or tweaks several provisions that were first introduced under the 2017 Tax Cut and Jobs Act (TCJA), including global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). It also makes several other largely taxpayer-friendly adjustments, although your excitement may vary depending on your specific business interests.
Keep reading for a rundown on eight noteworthy changes you and your tax advisor should be aware of, plus an update on one big, controversial change that didn’t actually happen:
1. GILTI is now NCTI (and slightly different)
In the wake of the OBBB, GILTI is now known as net CFC tested income (NCTI), where CFC stands for controlled foreign corporation. Moreover, the rules have changed slightly from the original TCJA version:
- GILTI deduction is reduced from 50% to 40% for tax years beginning after December 31, 2025.
- Expense allocation is narrowed such that there is now no allocation of interest and research and experimental (R&E) deductions for GILTI foreign tax credit (FTC) purposes, but directly allocable expenses are still allocated.
- Qualified business asset investment (QBAI) is eliminated, which means more foreign income is now included in the U.S. tax base.
- Reduction of foreign tax credit haircut from 20% to 10%.
This is the most significant international change in the OBBB. The adjusted rules essentially create a global effective tax rate (ETF) of 14% for foreign income earned by U.S. companies.
2. FDII is now FDDEI (and also slightly different)
The OBBB also makes minor tweaks to FDII rules. This includes changing the name to foreign-derived deduction eligible income (FDDEI).
Here are key shifts to be aware of:
- FDII deduction reduced from 37.5% to 33.34% (14% ETF) for tax years beginning after December 31, 2025. This is down from 50%.
- There is no allocation of interest and research and experimental (R&E) deductions; other properly allocable expenses are still allocated (this is significant and taxpayer-friendly).
- QBAI concept (“deemed intangible income”) was eliminated.
- For transactions after June 16, 2025, FDDEI excludes income from sales or transfers of intangible property (includes Section 367(d) transactions) and sales of property subject to depreciation/amortization/depletion.
These changes are largely a net win for taxpayers, although certain businesses may now have to start paying the corporate alternative minimum tax (CAMT).
3. BEAT gets largely taxpayer-friendly tweaks
The base erosion and anti-abuse tax (BEAT) is another provision originally from the TCJA, meant to keep companies from shifting U.S. income overseas to avoid tax liability. The OBBB makes several, mostly taxpayer-friendly adjustments to BEAT:
- New 10.5% permanent BEAT rate (up from 10%) plus 1% higher rate for banks and securities dealers.
- None of these applies: (a) reduction to base erosion threshold, (b) high-tax exception, (c) inclusion of capitalized interest.
- The use of general business credits such as R&D and clean energy is protected from the harsh impact of BEAT calculations.
4. Section 954(c)(6) is made permanent
The CFC-to-CFC look-through exception to the definition of foreign personal holding company income in Section 954(c)(6) is now permanent, which is largely a taxpayer-friendly change.
5. Section 898(c) one-month deferrals are eliminated
The OBBB eliminates the ability to make a one-month deferral election for CFC accounting periods. After November 30, 2025, CFCs must align their tax year with the tax year of their majority shareholder.
6. Section 863(b) is adjusted
If certain conditions are met, U.S.-produced inventory sold abroad can be deemed to be treated as a foreign source up to 50% for foreign tax credit purposes.
7. Section 163(j) sees “DA” back to “EBITDA”
Section 163(j) limits the amount of business interest expenses a taxpayer can deduct to 30% of adjusted taxable income (ATI). However, the OBBB changed the rules for what constitutes ATI.
- ATI on which the 30% limitation is calculated, has been revised to exclude the deductions for depreciation and amortization. This reinstates the definition of ATI that existed for tax years beginning before January 1, 2022, and results in allowing a greater amount of interest to be deducted each year. This provision is effective for tax years beginning after December 31, 2024.
- Because of the greater potential interest deductions for each year due to the increased ATI amount, the changes to the rules for apportioning interest expense to NCTI and FDDEI are of even greater significance.
- While ATI was enlarged by the change to exclude depreciation and amortization, ATI was reduced by excluding from its calculation Subpart F income, NCTI and section 78 gross-ups. This provision is effective for taxable years beginning after December 31, 2025.
- A special rule regarding capitalized interest now applies. Capitalized interest (other than under section 263(g) and 263A(f)) will be treated as interest expense in full and will absorb an equal amount of the section 163(j) limitation amount for that year before other interest expense. Any excess capitalized interest expense will be carried forward and treated as interest not subject to capitalization for purposes of the section 163(j) limitation. This provision is intended to prevent taxpayers from avoiding the 163(j) limitation by capitalizing interest expense into assets and is effective for taxable years beginning after December 31, 2025.
8. Other notable changes
The OBBB also made fixes to issues in the TCJA, including:
- Time-based allocation has replaced the last-day rule in terms of income allocation. Income is now allocated based on actual days of ownership, CFC status and shareholder status — and no longer based on who owns the shares by the end of the year.
- The limitation on downward attribution under Section 958(b)(4) was reinstated, and a new Section 951(b) inclusion rule was introduced. The combination effect would provide relief to certain clients who previously needed to file Form 5471 as category 5(b) or 5 (c) filers. This rule raises the threshold for a U.S. shareholder to have a net CFC tested income or subpart F inclusion. The loss of CFC status of foreign entities, however, may potentially lead to a passive foreign investment company (PFIC) exposure.
- The Section 960(b) amount has been removed from Section 78 gross-up, which is generally taxpayer-friendly.
- A 10% haircut to FTCs attributable to previously taxed earnings and profits (PTEP) distributions has been added.
9. Section 899 was not included (but may not be gone for good)
The proposed Section 899 was not included in the final bill, although Section 891 remains in the code and is unchanged. This is taxpayer-friendly.
- Section 899 was a provision essentially designed as retaliation for the global minimum tax (GMT), digital service taxes (DSTs) and the UK diverted profits tax.
- On June 26, the Treasury Department announced a formal understanding with the G7 alliance that the G7 will work toward implementing a Pillar 2 system that excludes U.S. companies and treats the U.S. GILTI (now NCTI) regime as a side-by-side system in exchange for removing Section 899 from the OBBB.
- However, Section 899 may not be completely dead in the water due to concerns about how the side-by-side international tax rules agreed to will be accomplished. If the implementation effort slows, stalls or becomes problematic, the specter of Section 899 could re-emerge.
- The U.K. and France have stated they will not repeal their DSTs. As DSTs are a concern of the Trump administration and were considered an extraterritorial tax in the Section 899 draft, this could also trigger a revisit to Section 899.
What should your business do next?
If your U.S. business earns foreign income or if you are a non-U.S. company with U.S. earnings, your tax burden may be impacted (positively or negatively) by the OBBB. Your first step should be to consult with your tax advisor on what, if anything, has changed and whether you should make adjustments to your tax strategy to minimize your burden moving forward.
How Wipfli can help
We help you navigate the complex world of international taxes. Ask us to assess your tax exposure and advise you on how to minimize your liability. Learn more here or visit our tax policy updates center.
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