On July 4, 2025, President Trump signed P.L. 119-21 into law, dubbed the One Big Beautiful Bill Act (OBBBA), into law. From an international tax perspective, the OBBBA modifies and makes permanent multiple provisions that were part of the signature tax bill from Trump's first term, the Tax Cuts and Jobs Act of 2017 (TCJA), including global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT). On balance, these changes are generally favorable for taxpayers, but the new law requires careful analysis to determine U.S. tax impact.  

The banner changes in the OBBBA to the international tax framework involve two key TCJA provisions, GILTI and FDII, which are rebranded as net CFC tested income (NCTI) and foreign-derived deduction eligible income (FDDEI), respectively. GILTI and FDII employed similar concepts in their TCJA iterations, and the OBBBA preserves that symbiotic relationship. Relative to current policy, the OBBBA reduces the deduction percentages provided in section 250(a)(1), which increases the includible portion of net tested income under section 951A and decreases the deductible portion of FDDEI. The effective U.S. tax rate imposed on qualifying income will rise from 13.125 percent under FDII to 14 percent under FDDEI and increase from 10.5 percent under GILTI to 12.6 percent under NCTI. Similarly, the OBBBA eliminates the special rules excepting deemed tangible income return from the GILTI and FDII bases. This change will have the effect of increasing both NCTI (thereby subjecting more controlled foreign corporation (CFC) income to U.S. tax) and FDDEI (thereby making more income of U.S. taxpayers eligible for the section 250(a)(1)(A) deduction) compared to their TCJA predecessors. 

While the NCTI base is generally larger under the OBBBA, the new law mitigates the effect of that change through modifications to the foreign tax credit (FTC) and expense allocation rules. The OBBBA reduces the haircut for deemed paid taxes attributable to tested income (and for the related gross-up) from 20 percent to 10 percent, thus allowing a larger share of those taxes to be credited. Additionally, for purposes of determining foreign source income in the section 904 limitation, the OBBBA eliminates the allocation of interest expense, research and experimental (R&E) expenditures, and other indirect expenses to section 951A income, which increases the FTC limitation for that category. The OBBBA also eliminates the allocation of interest and R&E expense to FDDEI, using slightly different language than that used for NCTI, so the base against which a deduction may be claimed is generally larger compared to TCJA. Finally, the actual or deemed outbound sale of intangible property (or any other depreciable or amortizable property) no longer qualifies for FDDEI; income from outbound licenses remains within the FDDEI base. 

The OBBBA modifies the BEAT and the limitation on deductible business interest expense in section 163(j), both of which were important provisions in the TCJA targeting base erosion. BEAT liability under the OBBBA is calculated with a permanent 10.5 percent rate and without reducing a taxpayer's regular tax liability for certain tax credits. The BEAT rate had been set to increase from 10 percent to 12.5 percent and the beneficial treatment for the tax credits was set to expire after the end of the year. Earlier versions of the legislation had proposed a high-tax exception from the BEAT, but this proposal did not make it across the finish line in the OBBBA. For section 163(j), the OBBBA restores and makes permanent the computation of a taxpayer's adjusted taxable income (ATI) under earnings before interest, taxes, depreciation, and amortization (EBITDA). This increase to the section 163(j) limitation compared to post-2022 law may impact BEAT and corporate alternative minimum tax (CAMT) liability due to a larger interest deduction. Finally, the OBBBA, in a departure from the TCJA, removes from ATI inclusions under sections 951(a) and 951A and their attendant gross-ups under section 78, which generally reduces the section 163(j) limitation compared to prior law.

The taxpayer-favorable changes in the OBBBA may give rise to secondary effects that eliminate the intended benefits of those provisions. Many of the changes described above, such as the expanded section 250(a)(1)(A) base and the return to pre-2022 section 163(j), will have the effect of reducing regular tax liability. Other OBBBA provisions, such as the restoration of 100 percent bonus depreciation and immediate expensing of domestic R&E expenditures under section 174A, will have a similar effect. Increased deductions may interact with provisions limited by taxable income, including the limits on net operating loss carryovers, the section 250 deduction, and the interest expense deduction. The reduction in regular tax liability may further implicate the CAMT or the BEAT. Moreover, the allocation of interest, R&E, and other indirect expenses to U.S. source income could arguably lead to an overall domestic loss, with attendant negative consequences. These secondary impacts should be carefully considered. 

In modeling the interactive effects of the OBBBA, taxpayers should critically evaluate whether to avail themselves of elections afforded by the legislation, including one-time elections (i) to accelerate deductions for capitalized R&E, and (ii) to refrain from applying 100 percent bonus depreciation to qualified property placed in service for the first tax year ending after January 19, 2025. These decisions should be informed by the effective dates for the legislation, with many of the international provisions taking effect for tax years beginning after December 31, 2025. In certain circumstances, delaying deductions (or refraining from accelerating deductions) may yield a permanent benefit to a company's effective tax rate. 

The OBBBA makes additional targeted changes to the international tax rules. After nearly two decades in temporary form, look-through treatment for CFC dividends, interest, rents, and royalties is now permanent under section 954(c)(6). The OBBBA also eliminates the one-month deferral under section 898(c) for CFC taxable years — this deferral created timing mismatches with TCJA provisions — so, going forward, CFCs will generally align their tax year to the tax year of their majority U.S. shareholder. In a similar vein, the OBBBA modifies section 951(a) to require each U.S. shareholder that owns stock in a CFC during the CFC's taxable year to include a pro rata share of the CFC's subpart F income in its gross income for that year. This eliminates the "hot potato" rule under prior law, as well as certain provisions, like section 951(a)(2)(B), that drew Department of the Treasury and Internal Revenue Service (IRS) attention in recent years. The OBBBA restores the limitation on downward attribution under section 958(b)(4) and adds a parallel system under section 951B to apply downward attribution in certain cases involving "foreign controlled U.S. shareholders" and "foreign controlled CFCs." This change curbs the unintended proliferation of CFCs following section 958(b)(4) repeal (so-called "faux CFCs"). Additionally, for purposes of the section 904 limitation, the OBBBA provides that income from inventory produced in the U.S. and sold abroad through a foreign office or other fixed place of business may be treated as up to 50 percent foreign source income (the sourcing rule in section 863(b) continues to apply in other contexts), which will tend to increase the section 904 limitation compared to prior law. Finally, the OBBBA removes the reference to section 960(b) from section 78, so foreign taxes imposed on distributions of previously taxed earnings and profits (PTEP) will not give rise to a gross-up and the OBBBA introduces a haircut for foreign taxes imposed on distributions of section 951A PTEP.

The OBBBA is also noteworthy for what it did not include: the retaliatory tax under section 899. The House bill included new section 899 to address "unfair foreign tax[es]" imposed on U.S. persons or certain entities owned by U.S. persons. But section 899 was removed from the Senate bill after Treasury reached an agreement with the other Group of Seven (G7) countries regarding Pillar Two. But section 899 may yet resurface as negotiations continue. 

With the OBBBA signed into law, Treasury and the IRS will begin issuing guidance to implement the international tax provisions of the law. While the changes are not as fundamental as those introduced by TCJA, interpretive questions will invariably arise regarding the operation of the new rules and their interactions. Taxpayers are encouraged to consider and model the effect of the new rules as applied to their particular facts and circumstances.  

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Chadwick Rowland, crowland@milchev.com, 202-626-1589

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