International Provision of the New Tax Law Effective for Tax Years Starting in 2026 by Pedro Porras, CPA
Posted on August 19, 2025
by
Pedro Porras
The One Big Beautiful Bill Act (OBBBA) modifies several international tax laws introduced in 2017 by the Tax Cuts and Jobs Act (TCJA), including a decrease in deductions and changes to the names of the Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) regimes. The following provisions are scheduled to take effect for tax years beginning after December 31, 2025.
GILTI and FDII
Congress introduced the Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) regimes in 2017 under the Tax Cuts and Jobs Act (TCJA) to help prevent U.S. businesses from shifting operations and profits offshore to low-tax countries.
The OBBBA permanently renames GILTI as Net CFC (Controlled Foreign Corporation) Tested Income (NCTI) while also removing key aspects of the original law effective for tax years after Dec. 31, 2025. These taxpayer-friendly provisions include:
- Reducing the GILTI deduction from 50 percent to 40 percent, resulting in an effective tax rate of 14 percent, rather than the previous 13.125 percent
- Removing the 10 percent deemed return on Qualified Business Asset Investment (QBAI), thereby expanding the tax base subject to inclusion of the CCTI and increasing shareholders’ NCTI inclusion amount
- Increasing the Section 163(j) limitation on deductible business interest expense by applying the 30 percent limitation to EBITDA (earnings before interest, taxes, depreciation and amortization), rather than EBIT, which will permit taxpayers to utilize more interest expense to reduce NCTI inclusions
- Increasing the deemed paid credit for foreign taxes paid from 80 percent to 90 percent
The OBBBA also renames FDII as Foreign-Derived Deduction Eligible Income (FDDEI) and makes the following changes permanent, effective for tax years beginning after Dec. 31, 2025:
- Reducing the deduction to 33.34 percent of FDDEI from 37.5 percent, which, in turn, increases the effective corporate tax rate on foreign-derived sales and services to approximately 14 percent from 13.125 percent
- Eliminating the QBAI for FDDEI calculations
While the OBBA brings higher effective rates for NCTI and FDDEI, these rates continue to run below the U.S. corporate tax rate of 21 percent.
BEAT
The new tax law permanently increases the Base Erosion Anti-Abuse Tax (BEAT) rate on the modified taxable income of large corporate taxpayers with annual gross receipts of $500 million or more over the three preceding years to 10.5 percent from 10 percent under the TCJA. It also retains taxpayers’ ability to claim certain credits against the BEAT that were scheduled to sunset in 2026. These include research and development (R&D) credits, low-income housing credits, renewable electricity production credits and Section 38 credits for qualified investments in depreciable property.
Subpart F Income
Under the OBBBA, U.S. shareholders in CFCs must now include their pro rata share of the CFC’s Subpart F income for all portions of the year during which they were U.S. shareholders rather than on the last day of the CFC’s tax year. This provision restricts multinational taxpayers from attempting to shift ownership and avoid the payment of Subpart F income in prior years.
The new law permanently extends Section 954(c)(6) look-through with the 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.
Downward Attribution
The OBBBA restores a section of the tax code that had triggered certain foreign corporations to be treated as CFCs for U.S. income tax purposes even when there were no U.S. shareholders with control over the entities. The removal of Section 958(b)(4) under the TCJA often created surprising results and 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.
About the Author: Pedro L. Porras, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides income and estate tax planning and consulting services to domestic and foreign high-net-worth families and closely held businesses with international operations. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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