U.S. Multinationals Face New Tax Rules Under OBBBA

The Public Law No. 119-21, One Big Beautiful Bill Act (OBBBA), introduces major changes to how U.S. companies are taxed on foreign income. The law updates several international tax provisions, including GILTI, FDII, and the foreign research expenses. While some provisions may offer new opportunities, others will increase U.S. tax liability. Business leaders with international operations may want to reassess existing tax strategies to prepare for year-end and beyond. Below are the key highlights.

GILTI and FDII Modifications

GILTI, or Global Intangible Low-Taxed Income, applies to certain profits earned by controlled foreign corporations. Under current law, U.S. corporations can deduct 50% of this income before calculating tax. Beginning in 2026, the deduction drops to 40%, and the name changes to Net CFC Tested Income (NCTI). Additionally, OBBBA changed the GILTI calculation formula by removing the NDTIR (Net Deemed Tangible Income Return). Currently, NDTIR is calculated as 10% of Qualified Business Asset Investment minus specified interest expense. These changes increase the amount of foreign income subject to U.S. tax.

Changes to the GILTI Foreign Tax Credit

Beginning in 2026, OBBBA limits the expenses allocable to foreign-source income in the GILTI category to:

(1) the §250(a) deduction for GILTI, and

(2) any other deduction that is “directly allocable” to GILTI.

Importantly, the new law indicates that no amount of interest expense or research and experimental expenditures is allocable to foreign-source GILTI category income, likely resulting in a higher GILTI FTC limitation.

Foreign-Derived Intangible Income (FDII)

This provision gives domestic corporations a lower tax rate on certain foreign-derived income. Starting in 2026, the OBBBA renamed FDII to Foreign-Derived Deduction Eligible Income (FDDEI), and the deduction under IRC section 250(a) will shrink from 37.5% to 33.34%.

Additional International Tax Updates

BEAT: The Base Erosion and Anti-Abuse Tax (BEAT) was scheduled to increase to 12.5% after 2025. The new law sets the rate at 10.5%, still up from the current 10%.

FTC Limitation – Inventory Sale Sourcing: The OBBBA added a new subsection §904(b)(6). This new subsection modifies the inventory sourcing rule solely for purposes of the foreign tax credit. It treats certain inventory income that is otherwise subject to allocation on the basis of production activities as foreign-source income if a U.S. person maintains an office or other fixed place of business overseas, and the inventory income is attributable to such office or place of business. Beginning in 2026, the amount treated as foreign-source is limited to 50% of the income from the sale or exchange.

951(a) Changes – Pro Rata Share Rules for US Shareholders of a Controlled Foreign Corporation (CFC): The OBBBA modifies the §951(a) rules to provide that if a foreign corporation is a CFC at any time during a taxable year, each U.S. shareholder which owns stock in such corporation during the CFC’s year must include in gross income such shareholder’s pro rata share of the CFC’s subpart F income (including GILTI). This is intended to make sure that a U.S. shareholder of a CFC recognizes their pro rata share of the CFC’s subpart F income, irrespective of ownership at the end of the tax year.

Restoration of §958(b)(4): IRC 958(b)(4) was removed by the 2017 TCJA and has been restored. The OBBBA reinstates §958(b)(4), which prevents the inadvertent downward attribution of stock ownership from foreign persons to U.S. persons in many situations, by providing that section 318(a)(3)(A) through section 318(a)(3)(C) were not to be applied so as to consider a U.S. person as owning stock owned by a foreign person.

898(c) Changes – Rules for Controlled Foreign Corporations: Effective for tax years beginning after November 30, 2025, OBBBA repealed the ability to elect a CFC taxable year that begins a month before the taxable year of the majority U.S. shareholder.

Section 163(j): The OBBBA added a new subsection §163(j)(8)(A)(vi). Beginning in 2026, the calculation of adjusted taxable income (ATI) will now exclude Subpart F income and Net CFC Tested Income (formerly GILTI). That means it’s likely that businesses will see a lower interest expense deduction beginning in 2026.

Foreign Research & Experimental Expenditures (R&E): The OBBBA permanently reinstates immediate expensing of domestic research and experimental expenditures, with an election to amortize certain expenditures. However, for foreign research activities, businesses are still required to capitalize and amortize expenses over a 15-year period.

Strategic Planning Considerations

Many of OBBBA’s international tax changes take effect in 2026, giving companies some time to evaluate the potential impact on their structure and planning. Business leaders are carefully considering next steps. It’s recommended that businesses review and align the tax year of foreign entities and review the transfer pricing agreements between the U.S. and foreign related entities before the year-end.

Beyond the new tax laws, global trade policy is still a moving target. Tariffs may influence how and where companies conduct their business. This can have a ripple effect and may further complicate long-term planning. Business leaders are encouraged to watch for additional tax and trade policy developments and to coordinate with advisors to prepare for what’s ahead.

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International tax policy is known to be complex, and the changes under OBBBA have made planning for multinationals even more complicated. With key provisions set to take effect soon, now’s the time to consult with a qualified tax advisor to determine how you will be impacted. If you have questions about the information outlined above or need assistance with another tax or accounting issue, KatzAbosch can help. For additional information, please contact us using the form below.