Key Takeaways
- New Net CFC Tested Income (NCTI) rules eliminate the QBAI offset, reduce the deduction to 40% and ease the foreign tax credit haircut — raising the U.S. effective tax rate to 12.6%–14%.
- The One Big Beautiful Bill Act (OBBBA) permanently extends Controlled Foreign Corporation (CFC) look-thru rules and restores Section 958(b)(4), reducing compliance burdens for U.S. multinational groups.
- The Base Erosion and Anti-Abuse Tax (BEAT) rate is permanently set at 10.5% beginning in 2026, slightly below the prior scheduled increase under the Tax Cuts and Jobs Act of 2017 (TCJA).
The One Big Beautiful Bill Act (OBBBA) made several important adjustments to the international tax provisions of the Internal Revenue Code (IRC). In many areas, it added permanency and provided certainty to provisions passed in the Tax Cuts and Jobs Act of 2017 (TCJA) that were set to expire or change beginning in 2026. With many of these updates taking effect in the 2026 tax year, now is the time to assess how they may impact the international aspects of your business.
We invite you to join us live or virtually at our International Business Conference on Thursday, December 11, where we’ll explore these developments in greater depth and share strategies and perspectives on global tax, trade and compliance issues affecting multinationals.
Global Intangible Low Taxed Income (GILTI) / “Net CFC Tested Income”
Perhaps the largest international change is to the GILTI tax regime, which was introduced in the TCJA. First and foremost, OBBBA has renamed the GILTI regime to Net CFC Tested Income (NCTI). The NCTI remains as a “top-up” tax paid by U.S. shareholders who own controlled foreign corporations (CFCs). The main changes to the NCTI regimes are as follows:
- The deduction for NCTI was adjusted to 40% starting for tax years beginning after December 31, 2025, and remaining indefinitely. Under the TCJA, this deduction had been 50% but was set to drop to 37.5% for tax years starting after December 31, 2025. The effective tax rate on NCTI following this decrease is between 12.6% and 14% depending on the foreign taxes paid.
- Elimination of the deemed tangible income return (DTIR) on qualified business asset investment (QBAI). Under prior law, CFCs were entitled to a 10% “carveout” of their tested income for their QBAI (i.e., tangible assets held by the CFC abroad like factories, warehouses, hotels, etc.).
- OBBBA reduces the foreign tax credit haircut for NCTI from 20% to 10% which allows companies to claim a credit for 90% of foreign taxes paid on NCTI inclusions.
PKF O’Connor Davies Observation: Generally, where CFCs are paying tax in jurisdictions at reasonable rates (i.e., non-tax shelter jurisdictions), the updated NCTI rules should not result in significant additional tax in the United States. This, however, could produce a significant difference for taxpayers holding assets in low tax jurisdictions or whose CFCs are not paying tax for other reasons (e.g., the use of foreign country net operating losses, which are not recognized for NCTI purposes).
Please see the below a numeric example showing the change in the rules with two different tax rates (15% and 5%).
In Example 1 below, we are using the following assumptions:
- Tested income – 100
- Basis in Qualified Business Property – 100
- Foreign Taxes – 15
Example 1 | ||
Item | Pre-OBBBA | Post-OBBBA |
Tested Income | 100 | 100 |
DTIR (QBAI offset) | (10) | — |
GILTI before deduction | 90 | 100 |
Section 250 Deduction % | 50% | 40% |
Net Inclusion | 45 | 60 |
U.S. Tax before FTC (21%) | 9.45 | 12.6 |
FTC % | 80% | 90% |
FTC Allowed (max U.S. Tax or FTC % of foreign taxes) | 9.45 | 12.6 |
Net U.S. Tax | 0 | 0 |
In Example 2 below, we use the same facts as Example 1, except that the foreign taxes paid are reduced to 5:
Example 2 | ||
Item | Pre-OBBBA | Post-OBBBA |
Tested Income | 100 | 100 |
DTIR (QBAI offset) | (10) | — |
GILTI before deduction | 90 | 100 |
Section 250 Deduction % | 50% | 40% |
Net Inclusion | 45 | 60 |
U.S. Tax before FTC (21%) | 9.45 | 12.6 |
FTC % | 80% | 90% |
FTC Allowed (max U.S. Tax or FTC% of foreign taxes) | 4 | 4.5 |
Net U.S. Tax | 5.45 | 8.1 |
Foreign derived intangible income (FDII), enacted as part of the TCJA Section 250, provides a deduction on intangible income earned from U.S. sales to foreign customers, known as Foreign Derived Intangible Income (FDII). A full description of the FDII provisions can be found here. The intent was to make it more desirable to develop and continue to own intangible property in the United States. The deduction under the TCJA has been 37.5% of FDII, bringing the net effective tax rate on this income to 13.125%. However, the deduction was set to be reduced to 21.875% in 2026, for a net effective tax rate of 16.41%.
Instead, OBBBA reduced the deduction from 37.5% to 33.34% starting in years beginning after December 31, 2025. This reduction in the FDII deduction is permanent and makes the net effective tax rate approximately 14%, which is in line with the NCTI. Additionally, rules which eliminate the deemed tangible income return in the NCTI rules above also apply to the FDII rules.
CFC Look-Thru Rules
The CFC look-thru rules under Section 954(c)(6) are designed to prevent certain payments between related CFCs from being treated as Subpart F income (i.e., taxable currently to the U.S. shareholder) when the payment does not represent income from outside the CFC group. The look-thru rules allow certain passive income (i.e., dividends, interest, rents, royalties) received by one CFC from a related CFC to be excluded from Subpart F income, as long as the income was derived from an active business. The CFC look-thru rules were a temporary provision added in 2006, which were extended a number of times over the years. Every time the provision was set to expire, businesses which utilized these rules began to worry about whether it would be extended again. OBBBA permanently extended the CFC look-thru rules of Section 954(c)(6).
Restoration of 958(b)(4)
Section 958(b)(4) prevented downward attribution of stock from a foreign parent to its U.S. subsidiary in determining whether foreign entities in a multinational group had U.S. shareholders under the Subpart F and NCTI rules. Essentially, it limited when foreign corporations would be treated as CFCs for U.S. tax purposes. Its repeal under the 2017 TCJA-expanded CFC classifications, often pulling in foreign entities with little or no real U.S. ownership, creating heavy reporting burdens. Without this limitation, stock owned by a foreign parent could be attributed to a U.S. subsidiary, causing many foreign corporations to be classified as CFCs.
Recognizing the unintended compliance burdens caused by the repeal, Congress later reinstated Section 958(b)(4). The restoration once again prevented downward attribution from foreign shareholders to U.S. subsidiaries, narrowing the number of entities classified as CFCs. At the same time, OBBBA introduced Section 951B, which targets “foreign controlled CFC groups” and establishes anti-abuse rules to address scenarios where foreign-parented groups could exploit gaps in CFC attribution. Section 951B defines a “foreign-controlled CFC group” as a situation where a foreign corporation owns more than 50% (by vote or value) of one or more CFCs. Section 951B ensures that although downward attribution is again limited under Section 958(b)(4), certain arrangements that attempt to circumvent U.S. tax oversight through foreign structures remain subject to regulation and treats those foreign corporations as part of a consolidated foreign controlled group.
Base Erosion and Anti-Abuse Tax (BEAT)
BEAT, created by the 2017 TCJA (Section 59A), is an additional corporate tax aimed at discouraging large multinational corporations from eroding their U.S. tax base by making deductible payments (e.g., interest, royalties or service fees) to foreign-related parties. BEAT applies to large C corporations which have an average annual gross receipts of $500 million or more (over the prior three-year period) and have a base erosion percentage (as defined by the rules) of 3% or higher. The base erosion percentage is calculated by taking the tax benefit from base erosion payment (i.e., interest, royalties, etc. paid to foreign-related parties) divided by the total deductions.
The BEAT tax was applied to modified taxable income under the rules and compared to the regular corporate tax liability. BEAT is only owed if the BEAT liability exceeds the corporation’s regular tax liability. The BEAT rate started at 5% in 2018 and increased to 10% for tax years 2019 – 2025. The rate was scheduled to increase permanently to 12.5% under the TCJA; OBBBA, however, adjusted the permanent BEAT rate to 10.5% for tax years beginning after December 31, 2025. There are other small adjustments made to the calculation of BEAT which are outside the scope of this article.
Final Thoughts
The changes to the international tax regime in OBBBA mainly extend prior law, with minor modifications (other than the welcome reversion to pre-TCJA law on downward attribution).Taxpayers should review their particular situation, however, to understand areas where they may be impacted, especially if their international operations are set to change or expand in 2026 and beyond.
Contact Us
Our team at PKF O’Connor Davies can help you understand how these rules apply to your business. If you have any questions, please contact your client service team or any of the following:
Christopher Migliaccio, JD
Partner
cmigliaccio@pkfod.com
Leo Parmegiani, CPA, MST
Partner
lparmegiani@pkfod.com
Thomas Kinder, JD, LLM
Director
tkinder@pkfod.com
Yevgeny Antonov, JD
Director
yantonov@pkfod.com