Tax Plan Details of the One Magnificent All-Encompassing Legislation (OABLA)
The One Big Beautiful Bill Act (OBBBA), recently passed, brings significant changes to international tax provisions, affecting Foreign Tax Credits (FTCs), GILTI (now Net CFC Tested Income or NCTI), FDII (now Foreign-Derived Deduction Eligible Income or FDDEI), the Base Erosion and Anti-Abuse Tax (BEAT), and Controlled Foreign Corporation (CFC) rules.
Renaming and Changes to NCTI and FDDEI
The name change from GILTI to NCTI is effective for tax years beginning after December 31, 2025. The Act removes the Qualified Business Asset Investment (QBAI) exclusion, which previously reduced taxable income by 10% of a CFC’s depreciable tangible property basis. This change broadens the tax base and increases tax liability.
FDII was renamed FDDEI with a reduction in the Section 250 deduction from 37.5% to 33.34%, increasing the effective tax rate on FDDEI from 13.125% to around 14% for taxable years after 2025.
Foreign Tax Credits (FTCs)
The haircut on foreign taxes attributable to NCTI is lowered from 20% to 10%, allowing a higher proportion of foreign taxes to be credited, reducing double taxation and increasing the credit’s value. Expense apportionment rules for the FTC limitation are made more favorable by allocating only expenses directly linked to CFC income to NCTI, while U.S. expenses like interest and R&D are allocated to U.S. source income.
BEAT (Base Erosion and Anti-Abuse Tax) and CFC rules
While specific detailed changes to BEAT and CFC rules were not extensively covered, the Act permanently extends the CFC look-thru exception for subpart F income. It reinstates proscription on downward attribution from foreign persons under section 958(b)(4), removes the Section 898 one-month deferral exception, and updates NCTI pro rata share rules, indicating stricter and clearer attribution rules for CFCs.
Other Changes
Clarifications and expansions have been made to the exclusions from Deduction Eligible Income (DEI) for FDDEI. Income from outbound transfers under Section 367(d) is excluded from deduction eligible income. The deduction for FDDEI is reduced to 33.34%, leading to an effective tax rate of 14% on FDDEI. The BEAT rate is set at 10.5%.
The proposed Section 899, which would have increased taxes on governments and residents of countries enacting "unfair foreign taxes," is not included in the final Act. Additionally, the Section 954(c)(6) look-through rule is made permanent, and Downward Attribution Eliminated and Section 951B Introduced to address policy concerns. Credits against the BEAT include R&D credits, low-income housing credits, renewable electricity production credits, and Section 38 credits.
In summary, the reform broadens the tax bases for NCTI and FDDEI by removing prior exclusions (QBAI), lowers related deductions leading to higher effective tax rates, makes FTC credits more accessible by reducing haircut percentages and amending expense apportionment rules, and tightens CFC attribution rules while preserving certain exceptions like the CFC look-thru rule. The changes mostly apply to tax years beginning after December 31, 2025.
Businesses hinging on investing in foreign entities will need to reevaluate their finance strategies in light of the changes to the Net CFC Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI) due to the One Big Beautiful Bill Act (OBBBA). The act alters FDDEI's Section 250 deduction, increasing the effective tax rate on FDDEI from 13.125% to around 14% for taxable years following 2025.
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