Expiring TCJA provisions: GILTI, FDII and BEAT
The Republican Congress early in 2025 is expected to pursue a budget reconciliation bill that would extend many expiring tax provisions of the TCJA, which the first Trump administration and a Republican Congress enacted in 2017.
Several international tax provisions in the TCJA are scheduled to expire Dec. 31, 2025. If Congress does not take action, the effective tax rates on GILTI and FDII would increase to 13.125% and 16.4%, respectively, and the BEAT tax rate would increase to 12.5%.
- GILTI: Section 250 currently allows U.S. corporations (and U.S. individuals who make a section 962 election) to deduct 50% of their GILTI inclusion, resulting generally in a 10.5% U.S. effective tax rate on GILTI. The deduction is scheduled to decrease to 37.5% starting in 2026.
- FDII: Section 250 currently allows U.S. corporations to take a deduction for a percentage of their income derived from exports. The FDII deduction is currently 37.5% but is scheduled to decrease to 16.4% starting in 2026.
- BEAT: Section 59A imposes an alternative minimum tax on U.S. corporations that make certain types of base-eroding payments to foreign-related persons. Payments subject to BEAT are currently taxed essentially on a gross basis at 10%. That rate is scheduled to increase generally to 12.5% starting in 2026 (13.5% for banks and dealers).
The nonpartisan Congressional Budget Office in May 2024 estimated that extending the current GILTI, FDII and BEAT rules would cost the federal government $141 billion through 2034. That amounts to 3.5% of the estimated $4 trillion cost of extending all expiring TCJA provisions.
That estimated price tag of $4 trillion, and an additional $600 billion of interest, could complicate an agreement between Senate and House Republicans, given continued concerns about the size of the existing federal debt and the continuing annual federal deficits. How the unified Republican Congress might offset costs or raise revenue in new tax legislation remains to be seen. The uncertainty underscores the importance of planning for various scenarios involving corporate rates and international tax rules.
Pillar Two and U.S. international taxation
It is uncertain whether the second Trump administration will continue discussions with the OECD regarding the United States’ adoption of the Pillar Two global international tax framework. The first Trump administration initially worked with the OECD regarding the new international tax framework, but Republicans have since then criticized the Pillar Two framework, citing concerns about the global competitiveness of U.S. businesses and a potential loss of tax sovereignty.
The Biden administration in 2021 agreed in principle to the Pillar Two framework. In each of the ensuing three years, it proposed reforming the GILTI and BEAT rules to bring the U.S. international tax system into closer alignment with the OECD Pillar Two Model GloBE rules. However, with a very narrow Democratic majority in 2022 and a divided Congress starting in 2023, the Biden administration was unable to get those proposals enacted.
Although the U.S. has not adopted rules that comply with Pillar Two, many countries have already passed legislation implementing the Pillar Two Model GloBE rules, and an EU directive requires that EU member countries do so.
Under the GloBE rules, multinational enterprise groups that are subject to an ETR of less than 15% in a country may be subject to an income inclusion rule (IIR) that would top-up the tax on income earned in that country so the income is subject to an ETR of 15%.
The Model IIR is similar to the U.S. GILTI tax regime, which generally applies only if the income earned by a controlled foreign corporation (CFC) is not subject to a tax of at least 18.9% in the foreign jurisdiction. However, unlike a Pillar Two-compliant IIR, which evaluates the ETR on a jurisdiction-by-jurisdiction basis (aggregating all affiliated entities and permanent establishments in the country), the GILTI high-tax exception is applied separately to income earned by each CFC.
Additionally, under the GILTI regime, foreign taxes imposed on all CFCs held by the same U.S. shareholder may be blended together and applied against the aggregate GILTI income from all those CFCs. GILTI is also currently taxed at 10.5%, less than the 15% GLoBE minimum tax.
If the U.S. does not revise GILTI or enact other Pillar Two-compliant legislation, the GILTI tax imposed on a CFC’s income may not fully relieve a CFC from an IIR enacted in the CFC’s jurisdiction. In such case, the U.S. may cede taxing rights over such income to that foreign jurisdiction by providing a credit for the Pillar Two taxes. The Trump administration and Republican Congress will need to decide whether to take unilateral action or work within the Pillar Two OECD framework to reclaim taxing jurisdiction over that income by revising the GILTI rules or enacting other Pillar Two-compliant legislation.
Pillar One and digital service taxation
In addition to the Model GloBE rules, the OECD framework includes a set of rules designed to address the tax challenges arising from the digitalization of the economy. Pillar One would create a system of profit allocation and revise nexus rules that would apply to large multinationals and allow the jurisdiction in which a sale occurs to tax a portion of the profits even if the seller does not have physical nexus (i.e., a permanent establishment) with the country.
The implementation of Pillar One was expected to occur when countries sign onto a multilateral convention. Although a draft of the multilateral convention has been completed, most countries have not shown much interest in implementing Pillar One.
If the U.S. and other countries do not sign onto the Pillar One multilateral convention, we may see countries once again imposing unilateral digital service taxes (DSTs), something the U.S. has opposed because they represent a significant foreign tax on many U.S. based technology companies. Canada and Italy have already introduced new or expanded DSTs. The Trump administration may decide to take unilateral action against countries that impose DST, such as threatening to impose additional tariffs on U.S. imports from countries with DSTs.
Looking ahead: The next chapter in U.S. international taxation
The second Trump administration will need to determine how the U.S. international tax system will coexist with the Pillar Two GloBE rules and address the possible proliferation of DSTs. The Trump administration may need to develop creative approaches to address these issues beyond imposing additional tariffs and may find itself cooperating with the OECD if the collective burden of tariffs causes a return to high inflation.
U.S. multinationals should work with their tax advisor to monitor potential U.S. international tax changes and model the corresponding implications on their global footprint. Businesses should pay particular attention to their supply chain and economic presence in foreign jurisdictions, as tariffs could significantly limit their cash flows. Additionally, they should be mindful of the global minimum tax.
