International Tax Provisions Included in The One Big Beautiful Bill Act

The OBBBA includes a provision to reinstate Section 958(b)(4) to prevent “downward attribution” of stock from a foreign person to a U.S. person when determining whether a foreign corporation is a controlled foreign corporation. When the Tax Cuts and Jobs Act of 2017 (TCJA) repealed this provision, it caused many U.S. subsidiaries of foreign companies to be considered as having ownership in other foreign subsidiaries owned by the foreign parent company, which triggered Form 5471 reporting requirements for the U.S. subsidiaries. The IRS subsequently provided some relief from the reporting requirements for taxpayers impacted by this rule, limiting the reporting requirements where the foreign parent company did not have a U.S. owner who owned 10% or more of the stock of the foreign parent company. With the repeal, multinational companies with a U.S. subsidiary in the structure may no longer be subject to reporting requirements generated with the repeal of Section 958(b)(4), provided the U.S. subsidiary does not have direct ownership of its own foreign subsidiaries.

The OBBBA also modifies the Global Intangible Low-Taxed Income (GILTI) rules, where the IRC 250 GILTI deduction is reduced from 50% to 40%, resulting in an effective tax rate on GILTI-tested income of 12.6%. In addition, allowable foreign tax credits claimed against a taxpayer’s GILTI tax liability are increased from 80% to 90%. The new law also removes the Deemed Tangible Income Return (“DTIR”), which generally equates to 10% of the Qualified Business Asset Investment (QBAI) amount, from the GILTI computation, which was a reduction in the computation of GILTI tested income. The new GILTI rules will increase the potential tax burden in two ways – a decrease in the Section 250 deduction and DTIR/QBAI will no longer reduce the tested income inclusion under GILTI.

The Foreign-Derived Intangible Income (FDII) rules would reduce the IRC 250 FDII deduction from 37.5% to 33.34%, resulting in a 14% tax rate on FDII-eligible income. Similar to the GILTI rules, the DTIR amount will be removed from the FDII computation, which will be a benefit to taxpayers when computing their FDII, since it would increase the amount of the FDII deduction

The OBBBA increases the Base-Erosion and Anti-Abuse Tax (BEAT) rate from 10% to 10.5%. The BEAT rate was scheduled to increase to 12.5% in 2026 under the Tax Cuts and Jobs Act.

In an earlier article, we discussed the proposed Section 899 rules in the House bill. Under the House bill, these rules would have imposed higher tax rates on certain taxpayers resident in jurisdictions that impose “unfair foreign taxes” (i.e., applicable taxpayers) and a modified BEAT regime for foreign-owned U.S. companies. The previous Senate bill and final version of the OBBBA  passed by the House did not include Section 899 after a “shared understanding” was made with G7 countries to exempt U.S. companies from the targeted “unfair foreign taxes.”

Author: Calvin Yung | [email protected]