The July 4, enactment of the One Big Beautiful Bill Act (OBBBA) came at a critical time for multinationals, as key international tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA) were set to expire or trigger effective tax rate increases at the end of 2025. While not a one-for-one extension of the TCJA rates, the OBBBA reduces many of the scheduled rate increases across the international provisions. It also omits several sunsetting provisions that would have otherwise raised the future tax burden. This results in a more stable landscape for taxpayers to plan and forecast under the new rules.
The international provisions in the OBBBA introduce a range of changes for multinational companies, modifying key elements of the TCJA-era regime. These include adjusting the international tax effective rates, renaming and reworking of the current global intangible low-taxed income (GILTI) regime as “net CFC tested income” and the foreign derived intangible income (FDII) deduction as “foreign derived deduction eligible income”, permanently extending the CFC look-through, enacting a “fix” for downward attribution issues following the 2017 repeal of Section 958(b)(4), and making changes to the foreign tax credit limitation calculation.
Alongside the name change of FDII and GILTI, OBBBA made sweeping structural changes to both regimes. These updates represent a significant shift in the U.S. international tax landscape, particularly for multinational groups and cross-border investments.
Grant Thornton Insight:
The changes brought forth by the OBBBA may result in significant changes for certain taxpayers. For example, taxpayers with domestic balance sheets that have significant tangible assets may see an increase in their overall FDDEI benefit, but the opposite may be true for taxpayers that historically claimed a net deemed tangible income return as a result of their tangible asset investment abroad. Taxpayers should immediately assess how the changes to the existing FDII and GILTI regimes, as well as the significant modifications to the interest expense limitation calculation, the foreign tax credit limitation, and the various other provisions in the OBBBA may impact their tax profile, forecasts and estimates. Additionally, the changes in the effective tax rates and in the computation of the international provisions open the door for short-term tax planning initiatives that may yield permanent benefits, but require execution prior to the end of 2025.
This legislative package is complex and far-reaching, and it contains tax provisions impacting nearly all taxpayers in some way. There will, of course, be still more clarity to come, with guidance and regulations on the horizon for implementation of the new provisions. However, taxpayers have, in many areas, gained the certainty they have desired to allow for longer-term planning. Many of the uncertainties that have weighed on businesses in recent years have been addressed. Upcoming tax rate increases have been scaled back, key technical fixes were made permanent, and the overhaul of the GILTI/FDII regimes opens new planning opportunities. Together, these changes create a more predictable tax landscape and give taxpayers a clear path for planning ahead.
The changes brought forth by the OBBBA may lead to meaningful shifts in outcomes for many taxpayers. For example, asset-intensive businesses that were previously penalized by QBAI under FDII may now qualify for the FDDEI deduction. Highly leveraged groups that struggled under both FDII and GILTI may also find themselves in a better position under the new rules.
Given the scope of the reforms, including changes to the FDII and GILTI regimes (now FDDEI and NCTI), modifications to the interest expense limitation and foreign tax credit calculation, and other international provisions, taxpayers should begin modeling now. These rules impact not only long-term tax posture but also near-term estimates, cash taxes, and financial reporting.
The changes to effective tax rates and the mechanics of key international provisions create a time-sensitive window for planning. Certain strategies may generate permanent tax benefits, but many require execution before year-end to be effective. Taking early action is critical.
GILTI reforms
The bill renamed the GILTI regime and made several modifications to the tax rate, the computation of Section 951A inclusions, as well as the foreign tax credit limitation calculation.
The bill increases the effective corporate tax rate on GILTI from 10.5% to approximately 12.6% for tax years beginning after Dec. 31, 2025, This change reflects the reduction in the Section 250 deduction from 50% to 40%, along with a smaller foreign tax credit haircut, down from 20% to 10%. After factoring in the disallowance of a portion of the foreign tax credit, the combined effective rate to eliminate U.S. residual tax rises to 14% (compared with 13.125% under current law). While this is an increase compared to the current 2025 rate, it is a reduction from the higher rate that was set to take effect in 2026 under current law.
The legislation also eliminates the net deemed tangible income return (NDTIR), which had allowed for a 10% return on qualified business asset investment (QBAI) to be excluded. With the removal of this exclusion, GILTI now captures all returns, including those from tangible assets, and is renamed “net CFC tested income” (NCTI) to reflect the broader base.
The rules for determining the NCTI foreign tax credit limitation were also revised. Under the updated approach, the Section 250 deduction and certain taxes are allocated to foreign source NCTI, while no interest or R&E expenses are allocable. Other deductions are allocable only if they are “directly allocable” to such income.
With respect to distributions of Section 951A PTEP, the bill disallows of 10% of foreign tax credits for taxes paid, accrued, or deemed paid on amounts previously taxed under Section 951A. This rule applies to any amount excluded from gross income under Section 959(a) by reason of an inclusion in gross income under Section 951A(a) after June 28, 2025. In other words, the 10% haircut now applies not only to deemed paid credits under Section 960, but also to direct credits under Section 901 that relate to prospective inclusions.
Grant Thornton Insight:
Together, these changes cause the regime to operate more like a global minimum tax. While this makes the U.S. system more closely resemble aspects of the OECD’s Pillar 2 framework (such as the income inclusion regime), key differences remain. Notably, the U.S. approach retains global blending, lacks a substance-based income exclusion and applies a lower effective tax rate.
FDII reforms
The bill makes similar changes to the FDII regime to align it with the GILTI reforms. The effective tax rate increases to approximately 14% for tax years beginning after Dec. 31, 2025, by reducing the Section 250 deduction from 37.5% to 33.34%. Similar to GILTI, while this is an increase compared to the current 2025 rate, it is a reduction from the higher rate that was set to take effect in 2026 under current law.
The calculation of deduction eligible income (DEI) now excludes gains from the sale or disposition of intangible property (as defined in Section 367(d)) and any other property that is subject to depreciation, amortization or depletion by the seller. This proposal would apply retroactively to sales or other dispositions occurring after June 16, 2025.
It also updates the allocation rules so that DEI is reduced by expenses and deductions, including taxes, that are properly allocable to the gross income, but does not reduce DEI for interest expense or research and experimental expenditures.
As with GILTI, the 10% return on QBAI is eliminated. With this change, FDII now includes returns from tangible assets and is renamed “foreign-derived deduction eligible income” (FDDEI), reflecting both the broader base and the shift away from intangible returns. It also updates the allocation rules so that DEI is reduced by expenses and deductions, including taxes, that are properly allocable to the gross income, but does not reduce DEI for interest expense or research and experimental expenditures.
Grant Thornton Insight:
The removal of QBAI from the FDDEI calculation expands the benefit to industries that were previously disadvantaged under the FDII regime. This includes manufacturing, transportation, and other asset-intensive sectors. Under prior law, taxpayers with large domestic tangible asset bases often saw little or no benefit due to the 10% deemed tangible income return that reduced their FDII. With that limitation now eliminated, those same taxpayers should re-evaluate their export-related income to determine whether FDDEI now yields a benefit that was previously out of reach. In addition, changes to the interest expense allocation rules may further improve outcomes for highly leveraged taxpayers, making the FDDEI deduction more broadly available and valuable.
Changes to the interest limitation under Section 163(j)
The more favorable calculation to determine the limitation for business interest expense under Section 163(j) — which uses earnings before interest, taxes, depreciation and amortization (EBITDA) instead of earnings before interest and taxes (EBIT) and expired at the end of 2021 — has been restored and made permanent for taxable years beginning after Dec. 31, 2024.
Additionally, the definition for domestic adjusted taxable income (ATI) is amended to exclude the following items, effective for taxable years beginning after Dec. 31, 2025:
- Subpart F inclusions under Section 951(a)
- Section 956 inclusions
- Net tested income inclusions under Section 951A
- Section 78 gross-up amounts
- The portion of deductions allowed under Sections 245A(a) by reason of Section 964(e) and 250(a)(1)(B) and by reason of any of the above inclusions.
The final bill also includes a rule that provides for taxable years beginning after Dec. 31, 2025, that the 163(j) limitation applies to certain capitalized interest. Section 163(j) now applies to business without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest under an interest capitalization provision, except for certain amounts required to be capitalized under Sections 263(g) or 263(A)(f).
Permanent CFC look-through
The bill makes permanent the long-standing look-through rule under Section 954(c)(6), which was originally enacted as a temporary provision and most recently extended through Dec. 31, 2025. The rule excludes from foreign personal holding company income certain dividends, interest, rents and royalties received by a controlled foreign corporation from a related CFC, to the extent the payments are attributable to earnings and profits that do not give rise to Subpart F income in the hands of the payor CFC.
Limitation on downward attribution
The legislation also restores Section 958(b)(4), reversing the repeal enacted under the TCJA. The repeal had allowed stock owned by foreign persons to be broadly attributed downward to related U.S. persons which, in turn, caused certain foreign corporations to be treated as CFCs even when no U.S. shareholder had actual control. This led to unintended inclusions under Subpart F and GILTI for indirect U.S. owners and created onerous filing requirements. The bill addresses this by reinstating the pre-TCJA limitation on downward attribution.
In addition, the bill introduces a new Section 951B, which applies Subpart F and GILTI inclusion rules to “foreign controlled United States shareholders” (FCUSS) that own more than 50% of “foreign controlled foreign corporations” (FCFC). Under the OBBBA, FCUSS will include in their income a pro rata share of Subpart F and GILTI with respect to the Section 958(a) ownership that the FCUSS has in the FCFC. Both FCUSS and FCFC are determined without regard to Section 958(b)(4). The provision is intended to narrowly target structures viewed by Congress as abusive, realigning the rules with the original policy objectives of the TCJA. The following charts show the application of this change.
Grant Thornton Insight:
The original goal of the TCJA was not to impose broad anti-deferral rules on passive U.S. investors with no direct or indirect control over foreign entities. According to the final conference report, the repeal of Section 958(b)(4) was intended to prevent foreign-parented groups from artificially avoiding CFC status through internal restructurings. By restoring the limitation on downward attribution and introducing a more targeted framework through Section 951B, the bill corrects the overreach of the TCJA and brings the rules back in line with Congressional intent. This is a welcome change that will reduce the burden for many U.S. shareholders who were never intended to be subject to CFC reporting or income inclusions.
Example 1 – U.S. and foreign owner
This flowchart shows the type of U.S. and foreign owner multinationals the OBBBA's Section 951B is targeting, followed by a table showing how each of the entities in the flowchart is being treated before and after OBBBA.
This table describes how different entity types of U.S. and foreign-owned multinational corporations were treated under 2017’s Tax Cuts and Jobs Act and 2025’s OBBBA.
Example 2 – Foreign-parented group
This flowchart shows the type of foreign-parented group the OBBBA's Section 951B is targeting, followed by a table showing how each of the entities in the flowchart is being treated before and after OBBBA.
This table describes how different entity types of foreign-parented multinational corporations were treated under 2017’s Tax Cuts and Jobs Act and 2025’s OBBBA.
Sourcing rule for inventory produced in the U.S.
Prior to the enactment of the OBBBA, income from the sale of inventory produced in the U.S. and sold through a foreign branch was treated entirely as U.S. source income. Under the OBBBA, solely for purposes of the foreign tax credit limitation under Section 904, a portion of that income may now be treated as foreign source. For taxable years beginning after Dec. 31, 2025, if a U.S. person maintains an office or other fixed place of business in a foreign country (as determined under Section 864(c)(5)), the portion of the income from the sale of inventory produced in the U.S. that is attributable to the foreign seller’s office or other fixed place of business is treated as foreign source income. However, the amount treated as foreign source shall not exceed 50% of the income from the sale or exchange of such inventory property.
Repeal of one-month deferral election for specified foreign corporations
Section 898(c)(2) historically provided that specified foreign corporations (which include CFCs) can elect a taxable year beginning one month earlier than the majority U.S. shareholder year. In the final bill, Section 898(c)(2) is repealed and the one-month deferral election is no longer available.
The OBBBA requires that specified foreign corporations currently under a one-month deferral election must transition. Beginning for the first taxable year after Nov. 30, 2025, specified foreign corporations that have previously elected the one-month deferral are required to change their taxable year to confirm with the majority U.S. shareholder taxable year. The final bill provides that the change is treated as initiated by the corporation under the one-month deferral election and that the transition is treated as having been made with the consent of the Treasury Secretary. Additionally, Congress delegated authority to the IRS to issue regulations and other guidance to address the allocation of foreign taxes paid or accrued in such first taxable year and the succeeding year.
Grant Thornton Insight:
Calendar year taxpayers with specified foreign corporations on an 11/30 year-end should begin evaluating the impact of a 13-month inclusion for 2025. These taxpayers should also consider the additional compliance burden of preparing short-period tax forms to report the newly required taxable year of such specified foreign corporations.
Modification of the pro rata share rules
Prior to the enactment of the OBBBA, Section 951(a)(1) required U.S. shareholders of CFCs to include their pro rata share of Subpart F income if they owned stock in the CFC on the last day of the year in which it was a CFC. The pro rata share is determined by reference to a hypothetical distribution of the gross income of the corporation as if the corporation distributed all of its earnings and profits for the year but reduced for the portion of the year on which the foreign corporation was not a CFC, and for certain distributions paid to any other person (with certain limitations).
The OBBBA removed the “last day” provision, effective for taxable year beginning after Dec. 31, 2025. The modifications to the pro rata share rules now require U.S. shareholders to include their share of Subpart F income if the U.S. shareholders own stock on any day during the CFC year (i.e., the year during which the foreign corporation is a CFC at any time). In addition, the determination of the pro rata share was revised to reflect the U.S. shareholder’s ownership and the CFC and U.S. shareholder status periods. Similar modifications apply to NCFCTI inclusions as they do for Subpart F income inclusions.
BEAT reforms
The final bill moderated the Senate’s proposed larger changes to the BEAT, raising the rate from 10% to 10.5%, rather than the proposed 14%, and permanently excluded the research credit and a portion of applicable Section 38 credits from reducing regular tax liability for purposes of computing a BEAT liability. However, it dropped the Senate’s other proposed amendments including the exclusion for base erosion payments to high-tax jurisdictions and the lowering of the base erosion percentage.
No significant changes to foreign R&E capitalization rules
Although domestic R&E expenditures can be fully expensed under the OBBBA, foreign R&E expenditures must still be capitalized and amortized over a 15-year window. As of May 12, 2025, the prohibition on immediately recovering the unamortized basis in foreign capitalized R&E expenses for any property abandoned, disposed, or retired is clarified to also prohibit a reduction to the amount realized upon disposition, therefore requiring foreign R&E to continue to be amortized.
Removal of [Proposed] Section 899
Perhaps one of the most notable elements of the final bill’s international tax section is the absence of proposed Section 899. This controversial provision, which would have introduced retaliatory taxes on companies and individuals based in jurisdictions with “unfair foreign taxes” — including digital services taxes (DSTs) and undertaxed profits rules (UTPRs) — was the subject of significant concern for foreign businesses and governments. The provision was dropped from the final bill on June 26, following an announcement by Treasury Secretary Scott Bessent that the U.S. had reached an agreement with G7 peers to exclude U.S. multinational enterprises from Pillar 2 taxes, including the UTPR, under the OECD global minimum tax framework. The agreement aims to allow the U.S. system to coexist with Pillar 2, which has long been a goal for many congressional members who argued that the GILTI should be “grandfathered” in. (Read more in our June 10 article on Section 899).
The removal of Section 899 followed substantial international negotiations, reflecting significant geopolitical complexities. The OECD, responsible for pioneering Pillar 2 rules, along with the EU and other implementing jurisdictions, will play critical roles in determining practical next steps.
Key open questions include:
- Will U.S. multinationals still need to file GloBE Information Returns?
- Will jurisdictions that have implemented Qualified Domestic Minimum Top-up Taxes (QDMTTs) retract these for U.S. multinationals or modify them based on the application of the U.S. rules?
- Which financial years will this concept of “GILTI coexistence” apply to? Noting that many jurisdictions may not have legislative procedures that would allow retroactive application to Jan. 1, 2024.
Wholesale amendments to the OECD Model Rules are not anticipated, with EU officials suggesting that any changes would likely be introduced through additional safe harbor mechanisms and administrative guidance. As such, the complete removal of the contentious UTPR appears unlikely. More plausible paths forward include treating GILTI (now NCTI) as a qualifying IIR, making the existing UTPR safe harbor permanent for U.S. multinationals, blessing the U.S. R&D credit as a compliant Pillar 2 credit and/or potentially introducing a QDMTT safe harbor for U.S. entities (possibly by suggesting that the U.S. tax system itself is comparative to a QDMTT).
Substantial geopolitical, administrative, and legal challenges persist. The coming months will determine whether this agreement leads to a stable global framework or increased uncertainty in international taxation.
Grant Thornton Insight:
The proposed Section 899 appears to have achieved its strategic objective. It prompted international negotiations that seemingly led to a favorable outcome for U.S. multinationals without needing to be enacted. However, significant uncertainties remain, including how implementation will unfold, whether non-G7 countries will conform to the agreement, and what long-term impact this will have on the broader Pillar 2 landscape. Any mechanism to exempt U.S. multinationals from aspects of Pillar 2 would likely require broad consensus across the Inclusive Framework ꟷ including jurisdictions that have already voiced concern, such as some EU officials and other national governments.
Grant Thornton Insight:
As things currently stand, Pillar 2 remains active legislation in many of the U.S.’s major trading partners, including across the EU, Australia and Canada, with ongoing registration obligations and initial filing deadlines beginning as soon as Q4 2025. Accordingly, U.S. multinationals should not prematurely halt their existing Pillar 2 compliance efforts but should continue preparing for potential application of these rules in fiscal year 2024 and beyond.
Effective dates for OBBBA international provisions
While most provisions in the OBBBA apply to tax years beginning after Dec. 31, 2025, several key changes take effect immediately or even retroactively, such as those tied to transactions after mid-June 2025. The table below provides a summary of the effective dates for the major provisions.
OBBBA international tax effective dates
This table provides a summary listing of the effective dates of the OBBBA’s various international tax provisions, describing the provision in the left column and the effective date, and any information pertaining to it, on the right column.
For more information, contact:
National Managing Partner,
Washington National Tax Office and International Tax Solutions
Partner, International Tax
Washington National Tax Office
Grant Thornton Advisors LLC
Cory Perry is a partner in Grant Thornton’s Washington National Tax Office and has worked for more than 12 years in international tax.
Washington DC, Washington DC
Industries
- Manufacturing, Transportation & Distribution
- Technology, Media & Telecommunications
- Private Equity
Service Experience
- Tax Services
San Francisco, California
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