The One Big Beautiful Bill (OBBB) Act, signed into law on July 4, 2025, introduced a number of changes to the U.S. international tax regime.
Many of these changes became effective January 1, 2026, for calendar year taxpayers and should be considered as companies complete their 2026 estimated tax calculations and financial statement reporting for income taxes. Following is a discussion of some of the more notable changes that impacted U.S. international taxation provisions.
Net CFC Tested Income (NCTI) – formerly known as Global Intangible Low-Taxed Income (GILTI)
The NCTI deduction under Section 250 was permanently reduced from 50% to 40%, resulting in an effective tax rate of 12.6% on NCTI. In addition, the 10% deemed tangible income return (DTIR) on Qualified Business Asset Investment (QBAI) is eliminated. Consequently, NCTI inclusions may increase for taxpayers with significant depreciable assets and QBAI.
Foreign-Derived Deduction Eligible Income (FDDEI) – formerly known as Foreign-Derived Intangible Income (FDII)
The FDDEI deduction under Section 250 was permanently reduced from 37.5% to 33.34%, resulting in an effective tax rate of approximately14% on eligible income. Similar to NCTI, the 10% DTIR on QBAI is also eliminated from the FDDEI calculation, which should result in an increased base for the deduction calculation. In addition, interest expense and research and experimentation costs are no longer allocable to deduction-eligible income.
Base Erosion Anti-Abuse Tax (BEAT)
For BEAT, the rate was previously scheduled to be increased from 10.0% to 12.5% after 2025. Under the OBBB, the increase to 12.5% was repealed and instead a permanent rate was set at 10.5% for tax years beginning after December 31, 2025. In addition, the OBBBA makes permanent the favorable treatment of the research credit and a portion of the applicable Section 38 credits.
Foreign Tax Credits (FTC)
The OBBB made several changes that impact U.S. FTC rules. For the NCTI FTC basket, the previously allowable deemed paid credit of 80% is being increased to 90%. In another taxpayer-favorable change, expense allocation to the NCTI basket is limited to only directly allocable deductions and the related Section 250 deduction. Thus, interest expense and research and experimentation costs will not be allocated or apportioned to the NCTI basket. The OBBB also introduced a special sourcing rule for certain sales of U.S.-produced inventory through foreign branches. Generally, if a U.S. person sells U.S.-produced inventory through a foreign sales branch, and such inventory is for use outside the United States, up to 50% of the sales income may be treated as foreign source income, thus overriding the general rule under Section 863(b), which would otherwise treat all such income as U.S.-source.
These changes to the FTC rules are effective for tax years beginning after December 31, 2025.
Controlled Foreign Corporation (CFC) group elections under Section 163(j) of the OBBB also made a change that impacts the Section 163(j) interest expense limitation calculation for U.S. shareholders of CFCs. Effective for tax years beginning after December 31, 2025, U.S. shareholders of CFCs must exclude CFC income inclusions under Sections 951(a)(Subpart F), 951A (NCTI), and 78 (FTC gross up) from their calculation of adjusted taxable income (ATI) for Section 163(j) limitation purposes. Consequently, CFC group elections will no longer provide an increase to the U.S. shareholder’s ATI for such income inclusions and the ability to deduct interest expense may be reduced.
Pursuant to recent transition guidance issued by the IRS (Rev. Proc. 2026-17), taxpayers may make or revoke a CFC group election for the first specified period beginning after December 31, 2024, without regard to the typical 60-month limitation. If a CFC group election is made or revoked for the period ending December 31, 2025, no further election may be made or revoked for any period beginning before December 31, 2030.
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