A Look At The International Tax Changes In The One Big Beautiful Bill Act

Highlights

• The U.S. Congress has enacted the One Big Beautiful Bill Act (OBBB), renamed "An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14." President Donald Trump signed the legislation into law on the afternoon of July 4, 2025.
• This Holland & Knight alert reviews the significant international tax changes of the OBBB, including the removal of proposed Section 899 from the OBBB and a related "side-by-side" solution with the Group of Seven (G7) that would exclude U.S.-parented groups from the income inclusion rule and undertaxed profits rule in respect of both their domestic and foreign profits, as well as a number of substantive, important changes to provisions in the Internal Revenue Code.

The U.S. Congress has enacted the One Big Beautiful Bill Act (OBBB), formally renamed "An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14." President Donald Trump signed the legislation into law on the afternoon of July 4, 2025. For a comprehensive analysis of the bill, see Holland & Knight's previous alert, "Trump Signs the One Big Beautiful Bill Act," July 2, 2025.

This Holland & Knight alert reviews the significant international tax changes in the OBBB, including the removal of proposed Section 899 and a "side-by-side" agreement with the Group of Seven (G7), as well as a number of substantive changes to provisions in the Internal Revenue Code (the Code).

Removal of Section 899 and Corresponding "Side-by-Side" Agreement

In a welcome and auspicious development, an understanding was reached with the G7 countries that – upon the removal of proposed Section 899 from the U.S. House of Representatives and U.S. Senate versions of the OBBB, along with the agreement of a side-by-side solution for the implementation of the global minimum tax – U.S. parented groups would be excluded from the application of the Pillar Two Global Anti-Base Erosion (GloBE) Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR) in respect of both their domestic and foreign profits.

The understanding between the G7 and U.S. has relevance beyond the G7 to the Organization for Economic Cooperation and Development (OECD) and G20 Inclusive Framework, which includes more than 140 countries. It will be challenging to develop this side-by-side understanding and the principles on which it is based with the Inclusive Framework with a view to expeditiously reach a solution that is acceptable and implementable to all. A resolution is particularly important in view of the statement made by the chairs of the Senate Committee on Finance applauding this agreement that "Congressional Republicans stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation."

Comment

At this time, U.S. multinational companies can still be affected by the Pillar Two implementation by other countries because the G7 understanding 1) does not constitute enacted legislation, 2) does not automatically extend to other Inclusive Framework jurisdictions that have enacted Pillar Two legislation and 3) the European Union's implementation of Pillar Two, while still legally binding for its member states, would need to accommodate the side-by-side arrangement through OECD-level modifications.

Changes Made by the OBBB

Unless otherwise indicated, OBBB changes would apply to tax years beginning after Dec. 31, 2025, and are permanent.

Global Low-Taxed Income (GILTI)

• Change of Name. OBBB renames GILTI to "Net CFC Tested Income"
• Tax Rate
  • Current Law Prior to OBBB. 10.5 percent, which increases to 13.125 percent after Dec. 31, 2025
  • OBBB. 12.6 percent
• Foreign Tax Credit (FTC) Limitation Changes and Tax Rates After Credits
  • Current Law Prior to OBBB. 20 percent "haircut" on the use of FTCs for GILTI purposes and an allocation of a broad array of expenses for GILTI FTC purposes
  • OBBB. FTC "haircut" reduced to 10 percent and expense apportionment limited to direct expenses to GILTI, a taxpayer-favorable change
• Tax Rate for Updated Credits (after Dec. 31. 2025)
  • Current Law Prior to OBBB. 16.4 percent
  • OBBB. 14 percent, a taxpayer-favorable change
• Qualified Business Asset Investment (QBAI)¹
  • Current Law Prior to OBBB. QBAI reduced the amount of income subject to GILTI
  • OBBB. Repeals QBAI, which will increase income subject to GILTI

Foreign-Derived Intangible Income (FDII)

• Change of Name. OBBB renames FDII to "Foreign-Derived Deduction Eligible Income"
• Tax Rate
  • Current Law Prior to OBBB.125 percent rate, which increases to 16.406 percent after Dec. 31, 2025
  • OBBB. 14 percent, a taxpayer-favorable change
• Modifications in Deemed Intangible Income (DEI). OBBB excludes 1) income or gain from the disposition (as well as a deemed disposition) of property giving rise to rents or royalties, and 2) certain passive income, including foreign personal holding company income and passive foreign investment income for which the qualified electing fund election had been made. The two foregoing categories of income are excludable irrespective that such income could be recategorized as general category income under the high tax kickout; this exclusion would apply to income attributable to amounts received or accrued after June 16, 2025. The purpose of this provision is to prevent the offshoring of intangible property, although the licensing of intangible property continues to be available.
• Computation of DEI
  • Current Law Prior to OBBB. Gross DEI reduced by deductions properly allocable to DEI for the taxable year
  • OBBB. Expense apportionment against DEI limited to deductions directly related to DEI, a taxpayer-favorable change
• QBAI
  • Current Law Prior to OBBB. Contains QBAI concept
  • OBBB. Repeals QBAI; this increases FDII benefits

Section 163(j): Limitation on Business Interest

• Current Law Prior to OBBB
  • Limits business interest expense deduction in a taxable year to a taxpayer's business interest income, which is 30 percent of the taxpayer's adjusted taxable income (ATI) and the taxpayer's floor interest plan
  • ATI is computed by reference to earnings before interest and taxes, and after depreciation, amortization and depletion (EBIT)
  • A U.S. shareholder of a controlled foreign corporation (CFC) may include a portion of its GILTI, Subpart F income and associated "gross ups" under Section 78 in ATI in certain circumstances
• OBBB
  • ATI is computed under earnings before interest, taxes, depreciation and amortization (EBITDA); rule made permanent; ATI determinations retroactive effective for all tax years beginning after Dec. 31, 2024
  • ATI is adjusted to exclude Subpart F income, GILTI inclusions and associated "gross-ups," an unfavorable change to taxpayers
  • Further, under the OBBB and compared to prior law, the Section 163(j) limitation will apply before the interest capitalization rules are applied, another unfavorable change to taxpayers

Base Erosion and Anti-Abuse Tax

• Current Law Prior to OBBB
  • The Base Erosion Minimum Tax Amount (BEMTA), also known as the Base Erosion and Anti-Abuse Tax (BEAT), is a minimum tax imposed on large multinational corporations operating in the U.S. The provision was enacted to discourage companies from shifting profits out of the U.S. through "base erosion" payments made to foreign related parties.
  • The BEMTA is generally calculated by comparing 10 percent of a taxpayer's modified taxable income (MTI) to the taxpayer's regular tax liability (reduced by certain credits but not all).² If the BEAT liability exceeds the regular tax liability, the taxpayer must pay the regular tax plus the excess amount.
  • Determining the BEMTA involves several steps, including identifying applicable taxpayers (generally those with average annual gross receipts of at least $500 million for the prior three tax years, meeting certain base erosion percentage thresholds of the total deductions taken by a corporation, calculating MTI by adding back specific deductions for base erosion payments, and determining the base erosion percentage based on base erosion tax benefits and deductions. (Base erosion payments must exceed 3 percent, or 2 percent in the case of banks and securities dealers.) Base erosion payments typically include deductible payments or accruals to a foreign related party such as interest and royalty, rent and services payments.
  • The BEAT rate is 10 percent for tax years from 2019 through 2025 and is set to rise to 12.5 percent beginning after Dec. 31, 2025.
• OBBB
  • 10.5 percent, a new rate
  • Retains favorable current law treatment of the research credit and certain other credits for offsetting BEAT liability, a taxpayer-favorable change
  • Does not include an exception for payments to high-tax countries (effective tax rate of 18.9 percent or greater), which was in the initial Senate version of OBBB and would have been a taxpayer-favorable change

International Internal Revenue Code Section Revisions

Section 863(b) Source of Inventory Rule

This section is changed to enable U.S.-produced inventory sold abroad through a foreign branch to be treated as up to 50 percent foreign source income for FTC limitation purposes. This change is taxpayer favorable and is intended to ameliorate the current Code rule that sources inventory exclusively by reference to the place of production.

Section 898(c)(2)

Section 898 generally requires a CFC to use the tax year of its majority shareholder. Section 898(c) permits a CFC to elect a tax year beginning one month earlier than the majority U.S. shareholder's year. That elective provision is repealed to avoid deferral tax planning. The proposal applies to tax years of specified foreign corporations beginning after Nov. 30, 2025, with a transition rule for a specified foreign corporation's first tax year beginning after Nov. 30, 2025.³

Section 951(a)(2) Pro Rata Share Rule

If a foreign corporation is a CFC at any time during a tax year of the foreign corporation, each U.S. shareholder who owns stock in that corporation during the CFC year is required to include a pro rata share of the corporation's Subpart F income for the CFC year in gross income. This change eliminates the "last day of the CFC's taxable year" inclusion rule. Now, for income inclusion purposes, every person who is a U.S. shareholder of a CFC at any time during the CFC's taxable year, not limited to holding shares on the last day of the taxable year, is required to include in income its pro rata share of the CFC's Subpart F and GILTI income. The rule for Section 956 inclusions would not change.

Section 954(c)(6)

The "look through" exception is made permanent. This exception provides that dividends, interest, rents and royalties that one CFC receives or accrues from a related CFC retain its character and is not treated as foreign personal holding company income for CFC purposes, provided certain conditions are satisfied. Making this rule permanent is important for U.S. international tax planning.

Section 958(b)(4)

This section, as existed prior to the Tax Cuts and Jobs Act (TCJA), is reinstated, thereby limiting constructive ownership of downward attribution of stock ownership, which had resulted in the classification of numerous foreign corporations as CFCs; this change is taxpayer favorable. Corollary to the reinstatement of the "old" Section 954(b)(4), new Section 951B is introduced, which applies downward attribution from foreign persons in select cases, as well as applies the Subpart F and GILTI rules to persons denominated as "foreign controlled U.S. foreign corporation" as if the former foreign person is a U.S. shareholder and the latter corporate entity is a CFC. The introduction of Section 951B is intended to address the types of foreign ownership structures that were the original motivation for the TCJA's repeal of Section 958(b)(4), but in a more targeted manner.

Comments

• The international tax modifications of the OBBB reflect certain themes of the overall tax bill, namely, 1) making former TCJA Code sections permanent to promote stability in tax planning, 2) an implicit bias to maintain intangibles in the U.S. and 3) the refinement of selected Code sections to promote good tax policy. Many of these provisions were foreshadowed in an international tax bill introduced by Sen. Thom Tillis (R-N.C.).
• When one examines the OBBB changes to GILTI and FDII provisions, there is an apparent, slight bias for U.S. companies to retain intangibles in the United States consistent with the current administration's trade policy of "America First."
  • This is evidenced in the renaming and repurposing of GILTI to "Net CFC Tested Income" to delete the term "intangible," along with renaming FDII to "Foreign-Derived Deduction Eligible Income" to deemphasize intangible income in the operation of these provisions.
  • More substantively is the repeal of QBAI for GILTI and FDII purposes. Removing the QBAI exemption aligns U.S. policy with broader reforms to the tax treatment of multinational enterprises aimed at broadening the tax base, discouraging the offshoring of U.S. manufacturing and streamlining the U.S. international tax regime.
  • Under the OBBB, under FDII, there is a 14 percent rate on qualifying income, which includes the license but not the sale of intangibles, while the tax rate on GILTI is 12.6 percent in the absence of foreign tax credits and 14 percent if there are foreign tax credits. Further, the change in the source of intangibles produced in the U.S. but sold through a foreign branch also is indicative of tilting activities to the United States.
  • Notwithstanding the foregoing, a bias still exists to manufacture overseas and import to the U.S. market, as the 14 percent rate does not apply to goods manufactured and consumed in the U.S.

Remittance Transfers

The OBBB introduced a new excise tax on international remittance transfers effective for transfers made after Dec. 31, 2025. When introduced in the House, Republicans enunciated the purpose of this new tax as follows:

The Committee believes that the ability of non-citizens and non-nationals of the United States to send payments to individuals in other countries through the system of remittance transfers may encourage illegal immigration and lead to the overreliance of some jurisdictions on the receipt of such remittance flows.⁴

Since its introduction, this proposal (in modified form) was also contained in the earlier Senate version. Further revisions were made as contained in the Senate-enacted version of the proposed reconciliation legislation, summarized below.

A remittance transfer is an electronic transfer⁵ of money sent by a consumer (an individual and not a business or other legal entity) in the U.S. to a recipient⁶ in a foreign country, typically exceeding $15. These transfers are commonly known as international wire transfers or remittances.

The excise tax would be imposed on cash remittances – that is, only on any remittance transfer for which the sender⁷ provides cash, a money order, cashier's check or any other similar physical instrument to the remittance transfer provider⁸, rather than on all types of electronic transfers.

Excepted from a remittance transfer would be funds 1) withdrawn from an account held in or by a financial institution that is subject to Bank Secrecy Act (BSA) reporting or 2) funded with a debit or credit card that is issued in the U.S.

Under the Senate proposal, the excise tax is 1 percent of the transfer, to be paid by the sender with respect to such transfer. The obligation to collect the tax is imposed on the remittance transfer provider, who collects the tax and remits such tax quarterly to the U.S. Department of the Treasury. The remittance transfer provider has secondary liability if the tax is not paid at the time the transfer is made.

Comments

• The Remittance tax impacts only individuals located in the U.S. who, through an electronic movement, transmits "cash" funds to any recipient in a foreign country. The Senate version eliminated the so-called "U.S. citizen or national sender exception."
• The language in the Senate version limits the excise tax to cash transfers or their equivalents instead of all electronic transfers, as in the House version, which removes any uncertainty of the applicability of this provision to cryptocurrency or stablecoin transfers.
• The House version prior to the final House vote was 5 percent, which was reduced to 3.5 percent, and the Senate version further reduced the tax to 1 percent.
• The Senate-enacted version is estimated to raise approximately $10 billion, which is nearly 10 times what the Senate's first draft of the provision would have raised.
• Note: Americans living overseas are generally unable to open U.S. bank accounts and likely are to be adversely impacted by this provision if they transfer cash from the U.S., with no way to recover the tax in the form of a tax credit.
• The provision will also apply to individuals in the U.S. who are outside the banking system and rely on wire transfers to remit funds to family members abroad. This could have a negative impact for certain countries that rely on remittances from the U.S.
• For further information about an earlier version of the Remittance tax, see Holland & Knight's previous alert, "Another Surprise in the One Big Beautiful Bill: Excise Tax on Remittances," June 11, 2025.

Unexpected Benefits

Finally, the OBBB has provided unanticipated benefits to the estates of foreign decedents with assets in the U.S. in excess of the $60,000 exemption who can claim the benefits of certain U.S. bilateral estate tax treaties. Absent an Internal Revenue Code or bilateral treaty exemption, the estate of a foreign decedent is subject to federal estate tax with graduated rates as high as 40 percent.

Now, with the OBBB making permanent an increased estate tax exemption of $15 million (indexed to increase with inflation) per individual, estates of foreign decedents dying after 2025 eligible to claim the benefits of certain bilateral estate or estate and gift treaties can benefit from this exemption. In illustration, some treaties (such as Canada's income tax treaty or the Switzerland and United Kingdom estate tax treaty) allow prorated exemptions based on the proportion of U.S. situs assets to worldwide assets. To claim these benefits, the estate must disclose the worldwide asset values on the U.S. estate tax return and file certain forms.

Footnotes

1. QBAI is a 10 percent tax exemption based on the value of buildings, machinery or equipment. The QBAI exemption partially shields U.S. multinational companies with lower profit margins on foreign tangible property, or a routine return. Amounts in excess of QBAI are viewed as the return on intangibles.

2. The Section 41(a) research credit and a certain portion of "applicable section 38 credits" do not reduce regular tax liability for purposes of computing a BEAT liability. Under current law, the current 10 percent BEAT tax increases to 12.5 percent for tax years beginning after Dec. 31. 2025, and the current law carve-out of the research credit and a portion of the applicable Section 38 credits are eliminated. That would have been detrimental, as it would generally have resulted in an increased BEAT liability by reducing the amount of the regular tax liability to which 12.5 percent of MTI is compared.

3. The purpose of this transition rule is to enable the IRS to issue guidance on allocating foreign taxes between the short year and succeeding tax year.

4. House Report 119-106, at 1779.

5. The term "electronic transfer" also known as an electronic funds transfer (EFT), is the digital movement of money form one bank account to another. These transfers are facilitated by computer systems and networks, such as the Automated Clearing House (ACH) and Federal Reserve system.

6. The recipient can be either a natural person or an organization. The recipient could also be the sender itself, in cases where the sender is transferring funds to its own account in another location, such as a foreign country.

7. The sender is the individual or entity that initiates the transfer of funds.

8. A remittance transfer provider is a company – typically a bank, credit union or money transmitter – that facilitates electronic transfers from consumers in the U.S. to recipients in other countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.