Analysis of the Innovation and Global Competitiveness Act

Current law: BEAT is a minimum tax that generally applies to certain corporations with at least $500 million of average annual gross receipts and a base erosion percentage that exceeds the statutory threshold. After OBBBA, the BEAT rate is 10.5% for tax years beginning after Dec. 31, 2025. A taxpayer generally computes modified taxable income by adding back certain deductible payments to foreign related parties, including service, royalty and interest payments.

Proposed change: The proposed legislation would narrow the definition of base erosion payments by excluding certain amounts that are includible in income under specified U.S. tax provisions, including subpart F income, NCTI, and income effectively connected with a U.S. trade or business for a foreign person. The proposal would also give Treasury authority to exclude other amounts that are otherwise subject to sufficient U.S. tax. In addition, it would allow general business credits to reduce BEAT liability by adding section 59A to the general business credit limitation rules.

Current law: Current BEAT rules generally do not contain a broad high-tax exception for payments to foreign related corporations. A deductible payment to a foreign affiliate may be treated as a base erosion payment even when the foreign recipient is subject to a meaningful local-country income tax.

Proposed change: The proposed legislation would create a high-tax exception for payments when the related foreign payee is subject to an effective foreign income tax rate of at least 18.9%. The proposed bill would measure the effective foreign income tax rate using the subpart F high-tax concept and would permit the rate to be established using applicable financial statements unless Treasury provides otherwise. It also would include a related-party funding rule: If a payment to a related foreign person directly or indirectly funds another payment to a lower-tax related foreign person, the first payment can be treated as made to the lower-tax person under the proposed rules.

The high-tax exception would not be available for payments to related parties that are tax residents of jurisdictions imposing a digital services tax or other discriminatory tax on a domestic corporation. The proposed bill would define discriminatory tax to include digital services taxes, certain taxes imposed on a base other than net income, certain taxes that apply predominantly to nonresidents or foreign corporations, and other foreign taxes identified by Treasury.

Current law: For tax years beginning after Dec. 31, 2025, section 250 provides a 40% deduction for NCTI and a 33.34% deduction for FDDEI. At a 21% corporate tax rate, those deductions generally produce a 12.6% effective U.S. tax rate on NCTI before FTCs and a 14% effective U.S. tax rate on FDDEI.

Proposed change: The proposed legislation would increase the FDDEI deduction from 33.34% to 40%. Assuming a 21% corporate tax rate, that change would reduce the effective U.S. tax rate on qualifying FDDEI from 14% to 12.6%. The proposed bill would also make several related section 250 changes: removing section 250 from the section 245A dividends received deduction limitation, removing the rule that prevents the section 250 deduction from being taken into account in determining the net operating loss deduction, and adding a look-through rule that treats certain interest paid by a CFC to a related U.S. shareholder as FDDEI when the interest is excluded from the CFC’s tested income.

Current law: FTCs generally reduce U.S. tax on foreign-source income, but the benefit is limited by separate limitation categories, expense allocation rules, timing rules and creditability requirements. Under current post-OBBBA rules, foreign taxes properly attributable to NCTI are subject to a haircut, and the FTC limitation calculation depends on the applicable income basket (general, passive, NCTI and branch) and expenses allocated or apportioned to that basket. Foreign tax redeterminations also may require amended returns or other adjustments when foreign tax amounts change after the U.S. return is filed.

Proposed change: The proposed legislation would eliminate the separate NCTI and foreign branch baskets, leaving the remaining passive and general categories as the principal section 904(d) limitation categories. It would also provide a carryover rule for net CFC tested losses by increasing the succeeding year’s tested loss amount for excess tested losses arising in the preceding five taxable years, treating the carryover as a pre-change loss for ownership change purposes under section 382.

In addition, the proposal would expand the section 905(c) redetermination rules to include timely changes between claiming a credit or deduction for foreign taxes and other changes in the amount or treatment of foreign taxes that affect U.S. tax liability. It would add an irrevocable election to treat redetermined foreign taxes as paid or accrued in the year of the redetermination, rather than reopening the original year. The proposed bill would also modify the special limitations period for refund claims involving changes in foreign tax liability, including deemed paid taxes.

For NCTI-related deemed paid credits, the proposed bill would repeal the 90% FTC haircut and would repeal the inclusion percentage limitation for taxes properly attributable to tested income.

Current law: Section 245A generally allows a deduction for certain foreign-source dividends received by domestic corporations from specified 10%-owned foreign corporations. Current law does not provide the same statutory treatment for certain tiered dividends received by CFCs that give rise to a U.S. shareholder’s subpart F inclusion.

Proposed change: The proposed legislation would add section 245A(g) and extend the foreign-source dividend deduction to certain tiered dividends received by CFCs. Under this provision, a U.S. shareholder’s subpart F inclusion resulting from a tiered foreign dividend would be treated as a direct foreign-source dividend for purposes of the section 245A dividends received deduction.

Current law: Subpart F generally requires a U.S. shareholder to include its pro rata share of foreign base company sales income and foreign base company services income earned by a CFC. Foreign base company sales income includes certain related-party purchases and sales involving property manufactured, produced, grown or extracted outside the CFC’s country of organization. Foreign base company services income generally targets certain services performed for or on behalf of related persons outside the CFC’s country of organization.

Proposed change: The proposed legislation would amend section 954(a) to eliminate foreign base company sales and services income as foreign base company income categories under subpart F. Under the proposal, these categories would no longer generate separate foreign base company income inclusions solely because the CFC earns related-party sales or services income that meets those category-specific rules.

Current law: Section 956 may require a U.S. shareholder to include income when a CFC invests in U.S. property, including certain loans to U.S. related parties, guarantees of U.S. obligations and pledges of CFC stock or assets. Current regulations reduce section 956 inclusions for many corporate U.S. shareholders to the extent the shareholder would be eligible for a dividends received deduction on an actual distribution, but section 956 can still matter for noncorporate shareholders and corporations that are part or tiered groups.

Proposed change: The proposed legislation would exempt U.S. shareholders that are corporations from the scope of section 956. Noncorporate U.S. shareholders would continue to be within the scope of section 956.

Current law: A CFC's distribution of appreciated intangible property to a U.S. shareholder may trigger gain recognition, deemed dividend income, and other tax costs under the existing international tax rules.

Proposed change: The proposed legislation would add new section 966 for certain distributions of IP from CFCs to U.S. shareholders. For eligible distributions, the fair market value of the IP would be treated as not exceeding the CFC’s adjusted basis in the property for specified corporate tax purposes. If the distribution is not a dividend, the U.S. shareholder would increase its stock basis in the CFC by the amount that otherwise would have been included in income, and the U.S. shareholder’s basis in the IP would be reduced by that same amount. Covered IP includes intangible property described in section 367(d)(4), other than goodwill and going concern value, and certain computer software described in section 197(e)(3)(B).

Current law: NCTI is generally determined by aggregating a U.S. shareholder’s pro rata share of CFC tested income and tested loss. Current law does not contain a specific exclusion for income earned by a qualifying U.S. Virgin Islands corporation from services performed in the U.S. Virgin Islands.

Proposed change: The proposed legislation would exclude qualified U.S. Virgin Islands services income from the NCTI calculation for specified U.S. shareholders. The income must be compensation for labor or personal services performed in the U.S. Virgin Islands by a corporation formed under U.S. Virgin Islands law, attributable to services performed in the U.S. Virgin Islands by individuals for the benefit of that corporation and effectively connected with a trade or business in the U.S. Virgin Islands. A specified U.S. shareholder includes an individual, trust or estate, and certain closely held C corporations that acquired their direct or indirect equity interest before Dec. 31, 2023.

Current law: For taxable years beginning after Dec. 31, 2025, in determining adjusted taxable income (ATI) for purposes of determining the section 163(j) interest expense limitation, a U.S. shareholder’s subpart F, NCTI, and section 78 gross-up on indirect FTCs are excluded.

Proposed change: The proposed legislation would repeal the OBBBA rule that excludes a U.S. shareholder’s subpart F, NCTI, and section 78 gross-up from ATI. The proposal would generally return to the pre-OBBBA approach under which those items would again be included in the ATI calculation for purposes of section 163(j). Combining those amounts with ATI would tend to increase ATI, which in turn would generally increase the amount of deductible business interest under the 30% ATI limitation for U.S. multinationals with significant CFC inclusions.