Big Beautiful Bill International Tax Changes

The One Big Beautiful Bill Act (OBBBA) made several changes to the taxation of international income.

The important international elements of the law can be divided into four major categories:

• The Section 899 retaliatory provision, which did not end up in the final law but had a significant impact nonetheless by expediting a G7 agreement on the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. conflicts it addressed
• Some elements consonant with the Trump agenda, such as further favoring domestic production and implementing a de facto export subsidy
• Some roughly revenue-neutral trades to bring the US international corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. system more in line with the rest of the world
• Some miscellaneous bug fixes and small improvements

Each of these has a significant and distinct motive for policy change and will be discussed below.

Section 899 Accomplished an Objective Without Becoming Law

Perhaps the most widely discussed international element of the OBBBA during drafting was the “Enforcement of Remedies Against Unfair Foreign Taxes.” This provision was ultimately removed from the final law but would have added a retaliatory mechanism under a new Section 899 of the tax code.

It was a direct response to certain taxes that Congress views as either extraterritorial or discriminatory toward the US. Section 899 specifically identified the undertaxed profits rule (UTPR), a provision from the Pillar Two global minimum tax deal, and various countries’ digital services taxes (DSTs).

Section 899 would have raised income and withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. tax rates and tightened the base erosion and anti-abuse tax (BEAT) on offending jurisdictions. Ultimately, this proposal was cut out of the final bill in response to a deal with the G7 that exempted American taxpayers from the UTPR. Though this agreement still needs to be translated into the respective legal codes of member nations before going into effect, it aims to prevent significant, destructive escalation. This retaliatory mechanism therefore had a substantial impact on global policy despite never actually going into effect.

Americans will benefit from the G7 concession on the UTPR, but the weaponization of tax policy as a geopolitical negotiating tool may not always yield the desired results if a compromise cannot be reached. Section 899, if implemented, would have made the US a wildly unattractive destination for almost all kinds of foreign investment, whether active or passive, substantially harming both the US economy and foreign investors.

The second objective of Section 899, the removal of DSTs, was not resolved by the G7 meeting.

OBBBA Implemented Some Elements of President Trump’s Vision

The OBBBA contained several tax policies motivated by the Trump administration’s policy prerogatives, especially on trade.

One such addition was the removal of the qualified business asset investment (QBAI) from the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) calculations, a significant change to the US international corporate tax system, reorienting a system designed to encourage exports and building in America.

Under the pre-OBBBA system introduced in the Tax Cuts and Jobs Act (TCJA), QBAI helped divide American corporations’ international earnings into tangible income and intangible income. The former comes from physical capital and labor, while the latter comes from sources like trademarks, ideas, or intellectual property. The rationale for creating these two categories of income and treating them differently was that intangible income, perceived to be more mobile, is easier to shift to lower-tax jurisdictions. Both GILTI and FDII enjoyed rates lower than the standard domestic statutory rate of 21 percent. FDII provided an incentive for corporations to locate their intangible assets within the US, while GILTI would effectively tax those corporations that did not do so.

QBAI created a rough approximation of tangible income, which was then subtracted from total income to arrive at intangible income. The provision required MNEs to deduct 10 percent of the value of their tangible assets (such as buildings or machinery) from the tax bases for GILTI and FDII.

The OBBBA removes the QBAI exemption from both calculations. This change effectively increases the tax burden for American companies with tangible operations abroad, while reducing the tax burden for exporters with tangible operations in the US.

In the absence of this step, GILTI becomes “net CFC-tested income” (NCTI) and FDII becomes “foreign-derived deduction eligible income” (FDDEI). These nomenclature changes also signify changes in function. FDDEI is now simply export income that receives a lower effective rate. In other words, this provision is an export subsidy. Meanwhile, NCTI operates as a worldwide corporate income tax system with no special focus on intangibles.

These changes may incentivize domestic corporations to conduct manufacturing and similar activities within the US. Unfortunately, physical activities abroad will face a comparative disadvantage versus foreign competitors that do not have worldwide tax systems or a substance carveout. These disadvantages will fall on activities that cannot be accomplished in the US, harming US competitiveness.

Another export subsidy through the tax code can be found in a new OBBBA provision that allows up to 50 percent of US-produced inventory sold through foreign branches to be considered foreign sourced for purposes of the Section 904 foreign tax credit limitation.

However, attempts to manipulate the trade deficit directly through taxation and subsidies often fall short of their targets, simply because a provision directly affecting trade in one direction often indirectly affects trade in the other direction.

Another policy consistent with President Trump’s priorities included in the final bill is a tax on remittances, or money sent to other countries for non-commercial reasons (most often immigrants sending money to family in their country of origin). This tax aligns with the broader presidential agenda to reduce immigration. The policy enacted is a 1 percent excise on outbound payments, but with substantial exemptions for US bank accounts and US credit or debit cards. This is a far-watered-down version of initial proposals, which were previously much broader and more likely to burden US citizens.

OBBBA Brought Statutory Rate on International Income in Line with International Norms

As the world under the Pillar Two agreement coalesced around a 15 percent anchor for international corporate income tax rates, the US GILTI system appeared to have a rate well below 15 percent—in theory, as low as 10.5 to 13.125 percent. However, GILTI had provisions that produced higher effective rates in practice. The OBBBA effectively traded away some of those GILTI idiosyncrasies to cut taxes for corporations and then raised the statutory rate up to a 12.6 percent to 14 percent range. This was roughly a neutral trade but gives the US a headline rate more in line with global norms.

One idiosyncrasy, for example, was how the US credited its companies for foreign taxes paid. Under the TCJA, the US credited just 80 percent. Falling short of 100 percent (the norm under Pillar Two) discourages a given jurisdiction from raising corporate taxes too much, but it also exposes US companies to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.. The OBBBA raised foreign crediting to 90 percent, reflective of a rise in global corporate rates to comply with Pillar Two.

Another US quirk removed by the OBBBA is a provision called “indirect expense allocation,” which effectively requires more of certain deductions to be taken against foreign income, and fewer to be taken against US income. This change exposes some income that most countries would deem international income to the full US 21 percent domestic rate.

These policies had their rationales under the TCJA; however, with mounting pressure to reach a 15 percent nominal tax rate, it made sense to remove these unusual provisions and instead derive the revenue from the simple NCTI tax rate.

OBBBA Cleaned Up Issues with Pre-Existing Tax Code

The OBBBA’s international provisions also made small improvements, clarifications, and fixes to the existing code. We note two examples here.

The first was a modification of constructive ownership rules, which help determine whether American taxpayers might be responsible for some tax liability for companies operating abroad. The OBBBA’s modification fixed an error from the TCJA in a specific constructive ownership rule known as downward attribution. Downward attribution means that stock (or other ownership) held higher up in an ownership chain—for example, by a parent corporation or a foreign shareholder—is treated as if it is also owned down the chain by the parent’s subsidiaries or other related entities. Some downward attribution is likely necessary to curb extreme circumvention of US tax rules—for instance, a shell ultimate parent entity (UPE) whose true owners are US-based. But too much downward attribution would result in legitimate US controlled foreign corporations (CFCs) of foreign UPEs becoming responsible for sister subsidiaries abroad unrelated to their business.

The TCJA’s writers intended to modify the limitation on downward attribution, but instead inadvertently removed the limitation entirely, altering CFC rules such that US subsidiaries of a foreign UPE could be attributed ownership in other foreign subsidiaries even in relatively normal tax arrangements. This mischaracterization wrongly obligated filings for Subpart F income and GILTI, needlessly heightening compliance costs. The OBBBA repealed this glitch with new constructive ownership rules.

Another “quality of life” fix in the OBBBA is the permanent extension of the once temporary look-through rule. This policy effectively exempts most intra-organizational transactions by related CFCs abroad from foreign personal holding company income. Such an allowance allows American multinational entities to more easily engage in cross-border transactions without incurring relatively arbitrary tax penalties that require planning to avoid.

The OBBBA moved the US international tax system in the right direction on several fronts by resolving a long-standing tax conflict with the G7, adjusting the corporate income tax to be in line with international norms, and making other sound improvements to the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.. However, some of the changes, while encouraging certain domestic activity and exports, may harm physical activity abroad that supports US competitiveness and domestic activity. 

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