International tax reform under the One Big Beautiful Bill Act

RSM insights: Streamlined effective tax rates (ETRs)

After factoring in the full application of 90% of foreign tax credit allowance provisions (which we detail below), the OBBBA aligns ETRs on FDDEI and NCTI (formerly FDII and GILTI, respectively) to 14% each. Taxpayers will want to reassess supply chain tax optimization strategies that relied on lower FDII or GILTI rates.

RSM insights: Impact of DEI changes

The OBBBA’s changes regarding the exclusion of income or gains from intangible and depreciable property, particularly deemed dispositions and section 367(d) transfers, limits U.S. multinationals’ ability to recognize gains under current favorable rules. This final provision differs from the exclusion originally suggested in the one of Senate’s preliminary legislative drafts by expanding beyond just sales or exchanges of property that generate rents or royalties.

Section 367(d)(4) assets, including intangible properties such as trademark, franchise, goodwill, etc., are excluded. The OBBBA also excludes tangible property from DEI calculation, which involves depreciation. This could curb the benefit associated with transfer of property that would otherwise create more DEI base and thus section 250 deductions when realized after the designated cutoff date.

For example: A U.S. company sells depreciable used machinery and equipment to a foreign buyer on June 30, 2025. Since the sale occurs after June 16, 2025, any income or gain from that sale would be carved out from DEI and thus generates lower FDDEI (formerly FDII) deductions, even though the equipment was previously used in producing goods for foreign customers.

Notably, the provision excludes interest expense and R&E expenditures from the pool of allowable reductions. The term “properly allocable” continuously defines the need for a reasonable and consistent method of assigning expenses and deductions (including taxes) to the gross income to which they relate.

Given the amended rules on expenses and deductions, taxpayers should consider revisiting cost allocation methodologies and reviewing the treatment of interest and R&E expenses separately.

RSM insights: A shift from asset-based to income-based calculation

Under current law, both FDII and GILTI calculations rely on tangible income adjustments—DTIR and NDTIR, respectively—which would effectively reduce the taxable income base by allowing a 10% return on qualified business asset investments (QBAI) and reward companies for tangible asset investments.

By removing these deductions, the calculation shifts to taxing the full net income without the 10% tangible asset offset. As a result, it will likely increase the taxable income subject to NCTI, potentially raising the effective tax burden on intangible income derived from foreign sources. For taxpayers, this means less incentive to invest in tangible assets abroad to reduce NCTI, and more emphasis on managing overall foreign income and deductions.

The elimination of DTIR and NDTIR, combined with reduced deduction rates, could result in higher ETRs for multinational corporations, especially those relying heavily on intangible income or offshore profit shifting.

In practice, companies may want to reevaluate the tax impact of foreign earnings and investments, as the elimination of the tangible income return deduction removes a key tax benefit that previously supported tangible asset investment abroad.

RSM insights: Deduction allocation for NCTI

This change could benefit many taxpayers by increasing the amount of foreign-source income in the NCTI (formerly GILTI) basket, thereby raising the FTC limitation and allowing more foreign taxes to be credited. By shifting general deductions—expressly interest and research and development—away from NCTI and toward U.S.-source income, the provision effectively preserves more foreign-source income for FTC purposes.

However, the benefit will vary depending on a taxpayer’s specific profile. Taxpayers with excess FTCs may see little impact, while others could experience a meaningful reduction in residual U.S. tax on NCTI.

RSM insights: Increase in deemed paid credit for GILTI taxes

Under the status quo, U.S. corporations are allowed to claim a deemed paid credit for 80% of foreign taxes attributable to GILTI income (i.e., 80% multiplied by the GILTI inclusion percentage). Increasing this to 90% enhances the value of FTCs available to offset U.S. tax on what is now NCTI. This change could reduce residual U.S. tax liability and improve overall tax efficiency, particularly for companies operating in higher-tax foreign jurisdictions.

In addition, the bill disallows 10% of foreign taxes associated with previously taxed net tested CFC income, meaning only 90% of such taxes would be creditable when previously taxed income is distributed. This aligns with the increased deemed paid credit and prevents taxpayers from receiving a full credit on income already excluded from U.S. taxation.

RSM insights: Sourcing income from U.S.-produced inventory

Income from the sale of inventory produced in the U.S. will be treated entirely as U.S.-source income, regardless of where the sale occurs. This treatment applies when calculating the FTC limitation, which restricts the amount of foreign taxes a U.S. taxpayer can credit against their U.S. tax liability.

This change could offer meaningful, though limited, relief for U.S. multinational corporations facing double taxation. By allowing up to 50% of the income from the foreign sale of U.S.-produced inventory to be treated as foreign-source—provided the taxpayer maintains a fixed place of business abroad and the income is attributable to that location—companies may be able to claim a larger FTC and reduce their overall U.S. tax liability.

This partial reclassification of income could be particularly beneficial for businesses operating in higher-tax foreign jurisdictions, where FTC limitations often result in unused credits. However, the benefit is capped, meaning that only a portion of the income qualifies, which may not fully offset foreign taxes paid.

Additionally, the provision could incentivize companies to establish or maintain foreign offices to qualify for the treatment, potentially influencing operational and structural decisions.

On the compliance side, taxpayers will need to carefully document the attribution of income to foreign business locations, adding complexity to tax reporting.

RSM insights: Slight changes to BEAT

The Senate’s June 16 draft of the bill proposed several provisions, including increasing the BEAT rate to 14%, excluding payments from base erosion treatment if companies were subject to a foreign effective tax rate above 18.9%, lowering the base erosion percentage threshold from 3% to 2%, and treating certain capitalized interest expenses as base erosion payments, among others.

However, the final version of the legislation removed those proposals. The moderate increase in the BEAT rate from 10% to 10.5% slightly enhances the minimum tax on large corporations engaging in base erosion transactions. Taxpayers will want to evaluate how this rate affects their intercompany payments and margins.

BEAT liability is calculated by taking modified taxable income, multiplying it by the BEAT rate, and then subtracting the regular U.S. corporate tax liability. The OBBBA removed the scheduled section 59A(b)(2)(B) provision, which would have reduced a taxpayer’s regular tax liability by all allowable tax credits, effectively making it harder to offset BEAT exposure with general business credits (e.g., the R&D credit, low-income housing credit, clean energy credits).

By removing this provision, the final law preserves the value of general business credits when determining BEAT liability. In practical terms, taxpayers can continue applying these credits to reduce their regular tax liability without increasing the likelihood of triggering BEAT, a favorable outcome for credit-heavy taxpayers.

RSM insights: Reduced CFC group election benefits

The OBBBA introduces two key changes to the business interest deduction rules that, together, appear to significantly reduce the practical benefit of using the CFC group election under current Treasury regulations.

Under current law, section 163(j)-7 allows a U.S. shareholder to make a CFC group election whereby certain CFCs are treated as a single taxpayer for purposes of applying section 163(j). This election permits CFC-level interest expense to be deducted against CFC-level ATI, thus avoiding interest disallowance solely due to separate entity limitations.

In practice, however, many U.S. taxpayers have adopted the CFC group election not to deduct interest at the CFC level, but rather to benefit from an increased ATI base. That increased base is largely driven by subpart F and GILTI inclusions, along with related section 78 gross-up amounts on the U.S. shareholder’s return.

The changes from the OBBBA directly undercut this strategy by removing subpart F, GILTI, section 78 gross-up, and section 956 amounts from the U.S. shareholder's ATI calculation. The bill also eliminates the corresponding deductions allowed under sections 245A and 250. As a result, the very ATI bump that made the election attractive is reduced. At the same time, it alters the order of operations for interest capitalization and deduction, requiring the section 163(j) limitation to be applied before any capitalization provisions.

Furthermore, capitalized interest under sections 263A(f) and 263(g) is excluded entirely from being treated as business interest under section 163(j), further tightening interest deduction possibilities at domestic and foreign levels.

These changes significantly alter the tax landscape. While CFCs are still subject to limits on interest deductions, the U.S. ATI base no longer includes foreign income inclusions, which previously boosted allowable U.S. interest deductions. As a result, taxpayers that elected (or considered electing) CFC group treatment solely to increase U.S. ATI should reassess its value. For many, the reduced tax benefit may no longer justify the added compliance burden.

RSM insights: Long-term clarity from permanent look-through extension

The foreign personal holding company (FPHC) look-through exception, under section 954(c)(6), was originally enacted as a temporary measure in the Tax Relief Extension Reconciliation Act of 2005. It was designed to reduce subpart F inclusions by allowing certain passive income—such as dividends, interest, rents, and royalties—received by one CFC from a related CFC to be excluded from FPHC income. It enabled greater flexibility in managing foreign-to-foreign cash flows within multinational groups without triggering immediate U.S. tax.

Over the years, the rule was extended multiple times, most recently by the 2020 Taxpayer Certainty and Disaster Tax Relief Act. However, its temporary nature created uncertainty for U.S.-based multinationals, necessitating periodic legislative tracking and short-term operational and fiscal strategies.

The final bill makes the section 954(c)(6) look-through rule permanent, eliminating this recurring uncertainty, which is a welcome development for multinational corporations, as it provides long-term clarity and supports continued use of efficient intragroup financing, licensing, and distribution structures. Taxpayers will want to consider revisiting structures that were previously altered or restricted due to uncertainty around the rule’s renewal and assess opportunities for renewed operational and tax efficiency now that a permanent extension may be in place.

RSM insights: Managing impact of SFC year change

An SFC generally refers to a foreign corporation that has one or more U.S. shareholders who owns at least 10% of the voting power or value of the corporation and is subject to certain U.S. tax rules because of that ownership, who is generally required to use the taxable year of their majority U.S. shareholder, known as the majority U.S. shareholder year, under section 898. However, SFCs could previously elect a taxable year beginning one month earlier, called the "one-month deferral year", which provided limited tax deferral opportunities and administrative flexibility, particularly for SFCs with complex shareholder structures.

The OBBBA repeals this election for taxable years beginning after Nov. 30, 2025, requiring SFCs to align their taxable year with that of their majority U.S. shareholder, eliminating the one-month offset. A transition rule mandates that the first taxable year beginning after this date end with the required U.S. shareholder year-end.

The transition year may be a short tax year, affecting FTC calculations, earnings and profits timing, and expense allocations. Taxpayers will want to carefully assess mismatches between book and tax years, adjust reporting systems, and update compliance calendars accordingly. Treasury guidance on foreign tax allocation will be important to navigating this transition.

RSM insights: Introduction of section 951B as a counterbalance of restored section 958(b)(4)

On Dec. 22, 2017, Congress repealed section 958(b)(4), which had previously prevented the downward attribution rules in section 318(a)(3)(A), (B), and (C) from applying to stock owned by non-U.S. persons when determining U.S. ownership. This means that some U.S. persons who were not otherwise considered U.S. shareholders may be treated as such, and some foreign subs that were not otherwise classified as CFCs may be treated as CFCs. Now that the OBBBA restores section 958(b)(4), these foreign subs may no longer be CFCs, which reduces compliance burdens and potential subpart F/NCTI inclusions.

For example: A foreign parent directly owns 100% of a foreign subsidiary (sub) and a U.S. sub. The U.S. sub is treated as constructively owning the foreign sub due to downward attribution from the common parent. Now, with the reinstatement of section 958(b)(4), that attribution is blocked, and the foreign sub is no longer a CFC.

However, the bill introduces section 951B to expand the reach of subpart F and NCTI (formerly GILTI) to cause a FCUS to be treated as an inclusion shareholder. Under current law, a U.S. shareholder that owns a CFC only through constructive ownership normally would not have a subpart F or GILTI inclusion from that CFC.

The restoration of section 958(b)(4) to prevent downward attribution would generally restrict CFC status for U.S. persons that have no real economic control over foreign entities. However, it also creates the potential for foreign multinational groups to avoid CFC classification by routing ownership through U.S. intermediaries. Section 951B steps in to plug that gap.

Under section 951B, income earned through such structures would still be taxed under subpart F and GILTI principles by treating the FCUS and FCFC relationships similar to traditional U.S. shareholder–CFC relationships. In effect, section 958(b)(4) sets the baseline ownership rules, preventing broad application of CFC status via downward attribution from foreign owners. Section 951B, in contrast, acts as a targeted override that applies only in cases of foreign control.

RSM insights: Expanded CFC inclusion rules

Under current law, a U.S. shareholder of a CFC must include in gross income their pro rata shares of the CFC’s subpart F and section 956 income for the taxable year in which or with which the CFC’s year ends, provided the foreign corporation is a CFC at any time during the year and the shareholder owns stock on the last day it is a CFC.

This inclusion is based on the portion of subpart F income that would have been distributed to the shareholder, reduced for periods when the corporation was not a CFC and for dividends paid to other parties on the shareholder’s stock, to the extent related to subpart F income and ownership periods. Similar rules apply for determining the U.S. shareholder’s GILTI (now NCTI) inclusion.

The OBBBA modifies this provision that U.S. shareholders who briefly held stock in a foreign corporation, potentially as part of a short-term restructuring or transaction, could now face subpart F and GILTI (now NCTI) inclusions even if they weren’t shareholders at year-end. This increases the importance of tracking ownership and CFC status throughout the year, not just at year-end.

Taxpayers involved in mergers, acquisitions, or divestitures will want to analyze ownership timing more closely, as midyear ownership changes could now trigger inclusions that were previously avoidable. For example, acquiring CFC stock for a short time, even days, could trigger income under subpart F or GILTI (now NCTI).