Global taxation reform: What changes to GILTI and FDII mean for multinationals

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces the most significant changes to U.S. international tax rules since the Tax Cuts and Jobs Act of 2017.

Among the most consequential changes for multinational enterprises (MNEs) are the redefinitions of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). These provisions —now renamed net CFC tested income (NCTI) and foreign-derived deduction eligible income (FDDEI), respectively—signal a shift in how the U.S. tax code treats foreign earnings and intangible income.

For MNEs, the new rules affect global tax forecasting, compliance, and reporting. When combined with the domestic "Big Three" provisions, they call for a fresh evaluation of supply chain structures, cost allocation strategies, and foreign tax credit (FTC) utilization. With most of the international changes taking effect in 2026, tax leaders will want to model the effects to identify risks and opportunities.

A closer look at how the One Big Beautiful Bill Act changes GILTI and FDII

The OBBBA reduces the section 250 deduction rates and makes them permanent. It sets the FDDEI (formerly FDII) deduction at 33.34%, leading to an effective tax rate (ETR) of 14%; and sets the NCTI (formerly GILTI) deduction at 40%, leading to an ETR of 12.6%, for tax years beginning after Dec. 31, 2025.

But the changes go deeper than rates. The percentage of deemed-paid foreign taxes under NCTI that can be claimed as a credit has increased from 80% to 90%. The legislation also eliminates the deemed tangible income return (DTIR) and net deemed tangible income return (NDTIR), mechanisms that previously allowed a 10% return on qualified business asset investments (QBAI).

Additionally, the OBBBA excludes interest expense and research and experimental (R&D) expenditures from allocable expenses and deductions (including taxes) when calculating deduction eligible income (DEI). The OBBBA also excludes from DEI any income or gain from the sale or deemed disposition (including the deemed sale or other deemed disposition or a transaction subject to section 367(d)) of depreciable or intangible property occurring after June 16, 2025.

Learn more about the technical changes to GILTI and the foreign tax credit under the OBBBA and the implications for multinational enterprises. 

Interplay with domestic “Big Three” business tax relief provisions

The combined effect of the OBBBA’s international tax reforms may vary depending on a company’s specific circumstances, and the actual ETRs for multinationals will be difficult to determine, whether higher or lower. However, the elimination of NDTIR from the NCTI calculation and the reduced section 250 deduction rates for both FDDEI and NCTI may impact companies that previously relied on FDII and GILTI deductions to lower their tax burden.

Their interaction with the so-called “Big Three” domestic business tax relief provisions introduces additional considerations for multinational enterprises (MNEs). The Big Three consists of:

• More favorable tax treatment of R&D expenses under section 174
• A more favorable limit to deducting business interest expense under section 163(j)
• Full expensing of qualified assets in the year they’re placed in service, known as 100% bonus depreciation

Section 174: R&D expenses

The OBBBA reverses a recent tightening of research cost recovery. Effective Jan. 1, 2025, taxpayers can immediately deduct all domestic R&D expenses rather than capitalizing and amortizing them over five years as was required under prior TCJA rules. Small businesses may even elect to apply this change retroactively to 2022, accelerating remaining amortization deductions.

Notably, no changes were made to the tax treatment of foreign R&D. Costs for research conducted outside the United States must still be capitalized and amortized over 15 years. However, the OBBBA amends the FDDEI rules so that R&D expenses are not allocated against DEI in computing FDDEI.

Under the pre-OBBBA framework, a portion of R&D costs could be allocated to foreign-derived income, reducing the FDII benefit. Now, all R&D is effectively treated as related to U.S. income for FDDEI purposes beginning after Dec. 31, 2025, maximizing the income that can qualify for the FDDEI deduction.

Likewise, for NCTI, domestic R&D expenses will not be apportioned to the NCTI foreign tax credit basket. In fact, under section 861-17, R&D expenditures are already excluded from apportionment to the GILTI (now NCTI) category.

In practice, this means a U.S. multinational can fully deduct its domestic research costs without reducing the portion of income benefiting from the FDDEI deduction or losing the capacity to credit CFC taxes under NCTI.

Section 163(j): Business interest expense

The OBBBA relaxes the limitation on business interest deductions under section 163(j) and adjusts how international income factors into that limitation.

Starting in 2025, the section 163(j) cap returns to the original 30% of EBITDA formula (earnings before interest, taxes, depreciation, and amortization). At the same time, starting in tax years beginning after Dec. 31, 2025, adjusted taxable income (ATI) will exclude the following from the calculation: subpart F, NCTI, section 78 gross-up, and other related items. In other words, U.S. companies can no longer add back their CFC income in computing ATI for the interest limit.

This change could affect some taxpayers using a CFC group election to boost ATI and thereby deduct more interest. The mechanism is authorized under section 163(j)-7(c)(4). Without the add-back, a U.S. shareholder could face a limitation on its interest deductions in the U.S. with narrowed ATI basis. However, the election retains relevance, allowing aggregation of business interest income and business interest expense across multiple CFCs.

Bonus depreciation

The OBBBA reinstates permanent 100% bonus depreciation for most tangible properties acquired after Jan. 19, 2025, enabling businesses to fully deduct those costs in the year of acquisition. It also introduces a temporary provision for "qualified production property," allowing full expensing for certain production-related building property constructed between Jan. 19, 2025, and Jan. 1, 2029, and placed in service in the U.S. by Jan. 1, 2031.

For FDDEI purposes, DEI is generally the applicable excess of gross income over allocable deductions. The provision on bonus depreciation would increase U.S. deductions and thereby increase the allocated deductions, potentially decreasing the FDDEI deduction by decreasing the proportion of remaining income that is foreign-derived.

On the contrary, the elimination of qualified business asset investment (QBAI) from the FDDEI formula removes the deemed tangible income return (DTIR) reduction from DEI. This change could increase the FDDEI deduction, as more income remains eligible without the QBAI offset.

Additionally, the OBBBA repeals the QBAI exclusion for NCTI as well, subjecting all CFC income to U.S. residual tax unless offset by foreign tax credits.

Accounting for income taxes under ASC 740 

Taxpayers accounting for income taxes under ASC 740 need to reflect the changes in tax law as of the enactment date. This includes any effects on the measurement of their deferred tax assets and liabilities.

The section 250 deduction provides a special deduction, and many taxpayers elect to treat GILTI (now NCTI) as a period cost. Most international tax provisions under the OBBBA do not take effect until Jan. 1, 2026. Therefore, for many taxpayers, the effects of the international changes on tax provisions may be limited to assessing whether the provisions affect the realizability of deferred tax assets, which could trigger changes to their valuation allowance. For taxpayers that account deferred taxes for GILTI (now NCTI), the introduction of new rules under the OBBBA may require remeasurement of deferred tax assets and liabilities in the period of enactment.

Additionally, the domestic provisions, including changes to the Big Three, are already in effect. The Big Three are treated as temporary differences for financial reporting purposes; however, they may affect other calculations.

Section 250 deduction and GILTI-related FTCs are nonrefundable, not allowed to be carried forward, and are subject to a taxable income limitation. This means that if taxpayers do not utilize them in the year incurred, the benefit is permanently lost.

The more favorable treatment of the Big Three deductions may reduce taxable income and reduce the value of the section 250 deduction and GILTI-related FTCs by trading off temporary differences for permanent ones.

What multinational enterprises should do now

The changes to FDII and GILTI could impact taxpayers’ ETR in various aspects and in different directions. With most of the international provisions taking effect for tax years beginning after Dec. 31, 2025, MNEs still have time to prepare. Consider the following:

• Model the impact: Quantify how the new deduction rates and FTC changes affect your ETR in future years.
• Review cost allocation methods: Revisit expense allocation for both FDDEI and NCTI and consider interest expense and R&D costs separately.
• Evaluate asset transactions: Reconsider fixed assets investments based on your specific circumstance.
• Reassess FTC positioning: Determine how the FTC changes in allowance and deduction reallocation affect your residual U.S. tax liability.
• Review supply chain structures: Determine whether they still deliver tax benefits under the new regime.

Long-term considerations for multinational enterprises

Over the long term, MNEs may consider strategic restructuring to align with the new tax framework. This may include revisiting entity structures, both tangible and intangible asset investments, and intercompany arrangements.

• Monitor guidance: Expect the anticipated Treasury regulations to clarify scope, definitions and application mechanics.
• Address compliance requirements: New rules on expense attribution and sourcing may introduce more detailed documentation obligations.
• Adapt to evolving rules: Legislative or international developments could further affect cross-border income computations and related tax positions.

Conclusion: Adapting to U.S. international tax reforms

The OBBBA’s overhaul of GILTI and FDII marks a pivotal moment in U.S. international tax policy. By shifting to a more comprehensive income-based model and tightening deduction rules, the legislation alters how foreign earnings are taxed and how U.S.-based multinationals calculate and report cross-border income.

Businesses should work with their global tax advisor to understand the implications, adapt their structures, and prepare for a more complex and demanding compliance environment.