U.S. Overhauls International Tax System in the One Big Beautiful Bill Act

August 5, 2025

On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (OBBBA), marking the most significant reform of U.S. international tax provisions since the Tax Cuts and Jobs Act (TCJA) of 2017. The law introduces a series of complex and far-reaching changes that will fundamentally reshape how multinational enterprises calculate, deduct, and report foreign income—with most provisions becoming effective in 2026.

This article highlights the key international tax reforms enacted in the OBBBA and their practical implications for U.S. businesses operating globally.

Redefining GILTI and FDII: Enter NCTI and FDDEI

The OBBBA replaces the Global Intangible Low-Taxed Income (GILTI) regime with Net CFC Tested Income (NCTI) and the Foreign-Derived Intangible Income (FDII) regime with Foreign-Derived Deduction Eligible Income (FDDEI).

The Section 250 deduction is permanently reduced to 40% for NCTI and 33.34% for FDDEI, for a targeted effective tax rate of 14% for both.
The legislation eliminates the 10% deemed return on tangible assets (formerly DTIR and NDTIR), removing an incentive to hold fixed assets abroad purely for tax purposes but not penalizing the FDDEI benefit for US assets.
- Changes to interest and R&E provisions under sections 163(j) and 174 will further impact the results.
Definition of FDDEI is narrowed to exclude income or gain from intangible and other dispositions; section 367(d) deemed royalty inclusions will no longer qualify.

These changes signal a shift toward full taxation of foreign income net of fewer exclusions —raising tax exposure for many multinationals and narrowing planning opportunities around foreign tangible asset investment. Changes to expense allocation requirements and allowable foreign tax credits may offset some of these effects in whole or in part.

Foreign Tax Credit, Expense Allocation & Sourcing Changes

The OBBBA revises foreign tax credit (FTC) rules to:

Exclude interest expense and R&E expenditures from expense allocations that reduce the FTC limitation in the NCTI basket;
Only the Section 250(a)(1)(B) deduction, state and local taxes, and “other directly allocable expenses” should be apportioned to NCTI – result is stewardship and other nondefinitely allocable deductions should not impact NCTI basket for FTC limitation purposes;
A new sourcing rule solely for calculating the FTC limitation may permit US exporters of goods wholly produced in the US to classify “up to 50%” of the sales income as foreign source if the sales are “attributable to a foreign office other fixed place of business;” and
NCTI PTEP distributions will be subject to a 10% haircut on allocable foreign income taxes (and the section 78 gross-up thereon is also eliminated).

Similarly, in calculating FDDEI and RDEI, neither interest nor R&E expense will reduce FDDEI.

While the reduction of the Section 250 deduction percentage and removal of the QBAI shield may significantly increase offshore income currently subject to US tax, the limitation on expense allocations to NCTI AND FDDEI, along with the increase in the section 960(d) credit percentage may more than offset these changes. That said, for NCTI, interest and R&D will go against US source income, and resulting overall domestic losses, if incurred, may also have surprising detrimental impacts. The taxpayers’ facts, attributes, and industry will all play a role in the outcome.

BEAT Enhanced; Interest Deduction Limitation Adjusted

The OBBBA strengthens the Base Erosion and Anti-Abuse Tax (BEAT) by making permanent a slightly higher rate of 10.5% (but which was slated to increase to 12.5% in 2026 under the TCJA). It also makes significant adjustments to Section 163(j) business interest limitations as follows:

The definition of Adjusted Taxable Income (ATI) reverts to an EBITDA-based calculation;
However, Subpart F income, NCTI, and Section 78 gross-up amounts are excluded from ATI starting in 2026; and
Certain capitalized interest is now explicitly subject to Section 163(j) limitations.

These changes may negatively impact multinational enterprises that have been increasing their US consolidated group section 163(j) limitations by foreign income attributes. The Controlled Foreign Corporation (CFC) grouping election, however, should still be relevant for maximizing offshore interest deductions for US tax purposes and avoiding additional NCTI.

Attribution Rule Changes for CFC/USSH Status

The OBBBA restores Section 958(b)(4), effectively reversing downward attribution rules from foreign to U.S. shareholders that had expanded the scope of CFC status under the TCJA.

In addition, it introduces new Section 951B, refining rules for indirect ownership and attribution to further limit deferral strategies and enhance transparency in foreign ownership structures; in practice this provision represents a partial offset to the restoration of Section 958(b)(4) and will result in certain Foreign Controlled US Shareholders having income inclusions and reporting requirements.

Permanent CFC Look-Through Rule, Pro-rata Share Changes and Tax Year Alignment

One long-standing subpart F exception is now permanent and there is a modification to long-standing CFC pro-rata share rules:

Section 954(c)(6) is codified permanently, allowing for continued look-through treatment of certain income between related CFCs.
Subpart F pro rata share rules are modified to allow partial subpart F and NCTI inclusions to part-year US shareholders (i.e., no more last day of the year rule except for section 956).
The one-month deferral election under Section 898 for taxable years of specified foreign corporations is repealed, simplifying alignment with U.S. shareholder tax years and reducing deferral techniques.
- Without Treasury relief, the short-period transition year could result in significant loss of foreign tax credits.

The permanency of the CFC subpart F income look-through rule which has been in the Code for 20 years now is welcome. The modification of the year-end ownership rule for subpart F and NCTI inclusions may have significant impacts on M&A transactions, and the removal of the one-month deferral exception while simplifying compliance and other technical matters, could have unexpected results without Treasury guidance.

Pillar 2 / Section 899

Recently, Treasury Secretary Scott Bessent announced an understanding with the G7 regarding the future of Pillar 2 and the United States (including proposed Section 899).

Congress removed punitive Section 899 from the OBBBA drafts for the time being based on this understanding – but depending on how things develop it could come back.
Future guidance needs to codify this agreement into law so that US taxpayers may reflect expected results in their financial statements with certainty.
Points still up for discussion: How do we define “US Parented Groups” and how will certain nonrefundable credits (like the US R&D credit) be treated under Pillar 2?
As presently discussed, it does not appear to address US entities in non-US Parented Groups.

These developments are overall good news for US multinationals, but we need to see what is implemented over the months to come.

Implications and Next Steps

Several of the OBBBA’s tax provisions represent a strategic tightening of the US international tax system. Companies must rethink how they structure foreign operations, allocate expenses, and manage cash repatriation.

Action Items for Multinational Enterprises:

Model the impact of NCTI and FDDEI on current and future earnings;
Review current expense allocation methods, particularly for R&E and interest and impact on NCTI and FDDEI calculations going forward;
Consider international changes to section 163(j) and potential impact on US interest limitation;
Reassess international supply chains and intangible property ownership due to tax law changes, considering new tariffs and expected future cash flows of the business; and
Align CFC structures with the new attribution and timing rules, particularly impacting upon mid-year M&A transactions between US buyers and sellers.

With the new rules primarily set to take effect for tax years beginning after December 31, 2025, taxpayers should begin preparing now to avoid costly surprises and compliance pitfalls in 2026 and beyond. To learn more about how these changes will impact your business, connect with our international tax services team here.