Key Takeaways
- President Donald Trump signed wide-ranging tax Legislation, P.L. 119-21 (the Legislation) on July 4. The Legislation will affect nearly every sector of the economy and every type of taxpayer.
- We previously published, on July 8, a comprehensive alert providing a summary and analysis of the Legislation.
- In this alert, which is part of an additional eight-part series taking a deeper dive into various portions of the Legislation (i.e., International Tax; Tax Credits and Opportunity Zones; Green Energy Credits; Estate Planning and Individual Taxes; Start-up Investors and Business Owners; Employer-Related and Executive Compensation; Health Care; and Exempt Organizations), we explain and analyze the implications of the international tax provisions of the Legislation.
- The Legislation further incentivizes onshoring and domestic production.
The Legislation combines spending and policy priorities from 11 congressional committees and will reshape federal policy across nearly every sector of the U.S. economy. There is a possibility for one or more additional reconciliation bills during late 2025 and 2026 and therefore additional opportunities for enactment of additional provisions as well as changes, corrections and improvements to the Legislation. And the importance of engaging with the IRS and Treasury as they develop guidance to implement some of the more complex provisions cannot be overstated.
The Legislation made permanent many elements of U.S. tax policy originally introduced in 2017 as part of the Tax Cuts and Jobs Act (PL 115-97) (TCJA). Although the Legislation was widely anticipated to extend TCJA rate benefits and otherwise refresh provisions of U.S. tax law set to expire, the conventional wisdom was that the reconciliation bill would focus principally on matters relevant to domestic businesses and provisions of U.S. tax law relevant to cross-border business and investment would receive a light touch. What emerged from the legislative process and the final Legislative text, however, were changes to and elaborations of U.S. tax law and policy that are certain to leave a lasting imprint on international tax practice – both broadly and as it relates to the U.S.
Many of the changes to U.S. international tax law brought about by the Legislation focus squarely on making the U.S. a more attractive place for business and investment and align closely with the Trump administration's objectives of reshoring manufacturing and making the U.S. a more competitive place from which to do business globally. However, equally important are the echoes of provisions that were ultimately left out of the Legislation but that, in combination with the administration's current trade policy, serve as a beacon to other countries to not erect taxes that discriminate against U.S. enterprises.
An overview of the Legislation's provisions relevant to cross-border businesses and investors is set forth below.
US Tangible Property Investments
To encourage domestic manufacturing and production, the Legislation makes two significant changes to existing U.S. tax law. First, it extends "bonus" depreciation to covered assets (e.g., equipment) acquired and placed in service after Jan. 19, 2025, meaning a domestic enterprise may now claim a deduction for 100 percent of an asset's cost in the year the asset is placed in service. Second, the Legislation allows for immediate expensing of 100 percent of the adjusted basis of "qualified production property" (e.g., U.S.-situs property that is integral to manufacturing tangible items or to agricultural or chemical production) that is placed in service between July 4, 2025, and Jan. 31, 2031, and meets certain other requirements.
These provisions are intended to incentivize the onshoring of production capacity to the U.S., and the qualified production property benefit is particularly compelling in that it provides taxpayers with an immediate deduction for property that might otherwise be subject to depreciation over a 39-year period (e.g., a manufacturing facility). U.S. and non-U.S. multinationals alike may find that construction of new manufacturing facilities in the U.S. yields a better tax-adjusted return on investment than construction of similar facilities abroad, even before other Legislation-related incentives (e.g., foreign sales benefits, enhanced business interest deductibility) are considered.
Research and Development
To ensure that the U.S. remains a favorable jurisdiction for various research and development activities, the Legislation restores a taxpayer's ability to immediately deduct U.S.-based research and experimentation costs (for instance, the salaries of engineers that develop or improve a product, including software) for amounts paid or incurred in taxable years beginning after Dec. 31, 2024. Although the TCJA had originally allowed taxpayers to deduct these expenses, since 2022 taxpayers had been required to capitalize and recover these costs ratably over a five-year period, which became a point of contention for certain taxpayers. Taxpayers now have the option of immediately deducting, or capitalizing and amortizing over a five-year period, U.S.-based research costs.
Costs associated with offshore research and experimentation activities remain subject to capitalization and recovery over a 15-year period.
Business Interest Deductibility
Consistent with an objective of making it easier to build or expand U.S.-based facilities and business operations, the Legislation enhances a U.S. taxpayer's ability to immediately deduct business financing costs by permanently restoring EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) as the key financial metric used in determining the overall limitation on business interest deductibility.
Under the TCJA, Section 163(j) generally limited the amount of business interest that a taxpayer may deduct to (1) business interest income, (2) 30 percent of its adjusted taxable income (ATI) and (3) certain interest associated with vehicle inventory financing. The TCJA initially defined ATI with reference to EBITDA, but for calendar years 2023 and beyond, the TCJA essentially equated ATI with EBIT (i.e., earnings before interest and taxes), which had the impact of severely limiting interest deductibility (i.e., because depreciation and amortization deductions were required to be considered in determining the ATI number against which the 30 percent limitation was applied). For several years, taxpayers have been campaigning to "bring back the 'DA,'" and the Legislation does just that by again equating ATI with EBITDA – this time on a permanent basis with effect for tax years beginning after Dec. 31, 2024.
The Legislation also makes limited incremental adjustments to Section 163(j) by explicitly requiring the provision's coordination with interest capitalization rules and by statutorily mandating that ATI will be computed without considering amounts related to offshore operations (e.g., subpart F or GILTI inclusions). These changes are effective for tax years beginning after Dec. 31, 2025.
More Favorable Sourcing Rules for Certain US-Produced Exports
In addition to the changes noted above, the Legislation mitigates potential disincentives for domestic production by permitting up to 50 percent of the income arising from export sales of U.S.-produced inventory through a non-U.S. sales office to qualify as foreign-source income. By overriding existing U.S. tax law in this scenario – which would otherwise source the income 100 percent to the location of production – the Legislation delivers a potential foreign tax credit benefit to U.S. multinationals and certain non-U.S. multinationals that produce goods in the U.S. for the export market. This change applies for tax years beginning after Dec. 31, 2025.
FDII and GILTI Regimes
Some of the biggest changes to the U.S. international tax rules relate to the foreign derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes that were first introduced in the TCJA. While the Legislation changes the names of these regimes (i.e., they are now known as the foreign-derived deduction-eligible income and net CFC tested income regimes, respectively), we will continue to refer to them as FDII and GILTI for convenience. The most substantive permanent changes the Legislation makes to these regimes include (1) eliminating the qualified business asset investment (QBAI) concept; (2) fixing the applicable deduction percentage relevant to each regime (which has the effect of modestly elevating the baseline effective tax rate for each regime); and (3) limiting the allocation and apportionment of interest and research expenditures against the income that is central to each regime (which maintains the regimes' fidelity by ensuring that taxpayer expenses do not inappropriately distort their intended operation). These changes are effective for tax years beginning after Dec. 31, 2025.
FDII
With respect to the FDII regime, the three changes above arguably improve the attractiveness of the U.S. as a hub for the international distribution of goods and the provision of global services. Although the Legislation fixes the overall effective rate for FDII at 14 percent, that rate is only slightly higher than the historic rate and is almost two-and-one-half percentage points lower than the rate that was scheduled to apply beginning in calendar year 2026. More importantly, the structural changes to expense apportionment and the elimination of the QBAI concept effectively ensure that taxpayers no longer face the hurdle that they historically had to overcome to fully realize the benefits of the FDII regime.
The Legislation also makes changes to FDII that seek to limit a taxpayer's ability to benefit from the regime when offshoring intellectual property or other valuable assets. Historically, gains and deemed royalties arising from outbound disposals of intellectual property to non-U.S. affiliates (e.g., due to a sale or Section 367(d) contributions) could qualify for favorable FDII rates; however, such a result does not align well with the TCJA policy of encouraging U.S. multinationals to onshore intellectual property, and thus the Legislation eliminates FDII benefits for all such disposals occurring after June 16, 2025. Importantly, the Legislation does not include the language contained in the earlier Senate version of the bill that would have made certain passive income – for instance, royalties paid to a U.S. parent company by a controlled foreign corporation (CFC) for the right to distribute locally – ineligible for FDII benefits. Such a limitation arguably would have been contrary to the objectives of FDII (e.g., to encourage holding intellectual property in the U.S.) and would have diminished the benefits of the FDII regime.
GILTI
With respect to the GILTI regime, the Legislation makes the three substantive changes noted above and permanently reduces the GILTI haircut on deemed paid foreign taxes from 20 percent to 10 percent. In making these changes, the Legislation seeks to improve the operation of GILTI by addressing certain structural deficiencies that have plagued GILTI since its beginning (i.e., the Legislation seeks to protect U.S. multinationals from having certain expenses – particularly those associated with financing and research – allocated to the GILTI basket) and by eliminating certain computational elements that may be perceived as incentivizing offshore production (i.e., the tax-free QBAI return is eliminated). As a result of these changes, for tax years beginning after Dec. 31, 2025, GILTI's effective tax rate rises slightly, to 12.6 percent (assuming GILTI earnings are not subject to foreign tax), and GILTI-related earnings bearing a 14 percent effective rate of foreign tax should not be subject to residual U.S. federal income taxation.
As with FDII, the Legislation operates to modestly increase the overall effective tax rate applicable to GILTI, but such increase is not meaningful in comparison to the rate that was scheduled to take effect beginning in calendar year 2026. Moreover, the changes to expense apportionment and the GILTI haircut on deemed paid foreign taxes should be welcome news to taxpayers in that those changes generally operate to reduce the incidence of double taxation on offshore earnings. That leaves the elimination of the QBAI-related return as the principal GILTI-related change that might be objectionable to taxpayers. For U.S. multinationals in businesses that demand significant CAPEX investment overseas (e.g., companies that participate in the global energy market), this change may be a material item. However, for other taxpayers, the elimination of the QBAI benefit may be a relatively modest price to pay for significant improvements to the GILTI regime – even though the Legislation's elimination of the QBAI benefit arguably moves the U.S. tax system closer to a worldwide full inclusion system.
Section 958(b)(4) Reinstatement
The Legislation reinstates Section 958(b)(4), which was repealed by the TCJA, on a prospective-only basis for taxable years beginning after Dec. 31, 2025. Before the TCJA, this section functioned to block downward attribution of stock ownership in the context of determining which corporations were CFCs; following the TCJA, its elimination resulted in a significant increase in the number of CFCs (including non-U.S. companies that were considered CFCs for U.S. tax purposes) and created a certain amount of disruption to the previous operation of a variety of U.S. tax rules – including the portfolio interest rules potentially relevant to inbound lenders.
As a companion to Section 958(b)(4) reinstatement, the Legislation enacts new Section 951B, which is designed to implement a targeted approach to reinstating Section 958(b)(4). New Section 951B also operates on a prospective-only basis for tax years beginning after Dec. 31, 2025.
Other Changes Principally Geared Toward US Multinationals
The Legislation also makes four key changes to U.S. international tax law principally relevant to U.S. persons that invest or engage in business outside the U.S. One of these changes is clearly taxpayer-friendly, while the other changes appear to be anti-abuse in nature.
The taxpayer-friendly change makes permanent the subpart F "look-through" rule of Section 954(c)(6), which allows payments from related CFCs to escape characterization as foreign personal holding company income in appropriate circumstances. This look-through provision has been serially continued on an interim basis for decades, and the Legislation now makes it permanent for tax years beginning after Dec. 31, 2025.
The first anti-abuse change permanently eliminates the opportunity to elect a one-month deferral of the required U.S. tax year of U.S.-owned foreign corporations (generally CFCs) under Section 898. The change arguably seeks to eliminate on a going-forward basis the tax year-end change planning that became prevalent following the adoption of the TCJA (which had incongruent effective dates for many of its tax law changes). This Legislation change is effective for tax years of specified foreign corporations beginning after Nov. 30, 2025.
The second anti-abuse change permanently modifies the pro rata rules under Section 951(a) that are relevant to the application of subpart F and GILTI. Most significantly, the revised rules no longer (1) trigger inclusions solely for U.S. shareholders that own a CFC on the last day of the CFC year, or (2) allow distributions to operate to reduce or eliminate taxable income. These changes appear to target Section 951(a)(2)(B) and similar tax planning strategies that were permissible following the adoption of the TCJA. While these legislative changes largely apply for tax years of non-U.S. corporations beginning after Dec. 31, 2025, because the changes are anti-abuse in nature there are some transition rules relating to actual and deemed dividends that may have an immediate impact on current-year tax results.
The final anti-abuse change attempts to permanently eliminate the ability to claim a deemed paid credit for non-U.S. taxes associated with the GILTI haircut (e.g., the non-U.S. taxes associated with the 10 percent haircut associated with GILTI inclusions) when previously taxed earnings and profits are later distributed to the U.S. The changes arguably target foreign tax credit planning that occurred due to revisions to Section 960 made in connection with the enactment of the TCJA. Because this Legislation change is anti-abuse in nature, it is effective for amounts distributed after June 28, 2025.
BEAT
The Legislation repeals the scheduled increase in the base erosion and anti-abuse tax (BEAT) rate, which was set to adjust from 10 percent to 12.5 percent for tax years beginning after Dec. 31, 2025, and instead permanently adopts a slightly higher 10.5 percent rate that applies for tax years beginning after Dec. 31, 2025. It also permanently eliminates an unfavorable recalibration of the BEAT-relevant determination of "regular tax liability" that was scheduled to take effect for tax years beginning after Dec. 31, 2025, and, because of this change, a taxpayer's utilization of credits to reduce its regular tax liability will have the same impact on BEAT calculations going forward that it had in prior years. Although the applicable BEAT rate is modestly increased, these changes are on balance quite favorable.
Importantly, the Legislation did not include "super" BEAT provisions – which would have increased the BEAT rate to 14 percent and made the provision applicable to more taxpayers – that were included in the Senate's original draft Legislation.
Pillar 2 and DSTs
For multinational enterprises, one of the most important aspects of the Legislation is what was left out of the final bill. As most international tax professionals are aware, the U.S. has a history of engaging on a multilateral basis to develop consensus views on tax issues of global importance but generally refuses to commit to binding multilateral tax arrangements – particularly those that relate to the allocation of taxing rights. One reason for this is that while the U.S. Treasury Department has an interest in developing an understanding of, and possibly consensus views regarding, tax policy matters of global importance, the U.S. Congress understandably has its own interest in ensuring that its role and autonomy regarding legislative and tax matters, and the sovereignty of the U.S. more generally, remain inviolate. Given this background and the scope and focus of work done by the OECD-led Inclusive Framework, it should come as no surprise that the U.S. Congress and the Trump administration are reticent to align U.S. tax laws with Pillar 2 (i.e., the Inclusive Framework's model rules for effectuating a 15 percent global minimum tax).
The U.S. government's position is that the U.S. tax system is sufficiently robust and other countries should refrain from applying Pillar 2 rules to any income that the U.S. taxes. However, to make this point explicit, earlier versions of legislative text from the U.S. House of Representatives and the U.S. Senate included a new statutory provision, Section 899, the aim of which was to discourage foreign countries from enacting and applying discriminatory, extraterritorial or similar taxes that disproportionately have a direct or indirect impact on U.S. persons. The proposed law would have specifically targeted foreign countries that enact undertaxed profits rules (UTPRs), DSTs, diverted profits taxes and similar measures, and when relevant would have modified the regular U.S. tax rates applicable to individuals and companies that are tax resident in such "discriminatory foreign countries" by incrementally increasing the applicable U.S. tax rate by 5 percentage points each year (but capping the overall increase at 15 or 20 percentage points). The provision garnered significant international attention, and despite its similarity to the Inclusive Framework's UTPR (i.e., an in terrorem tax rule designed to coerce other countries to adjust their local tax laws to avoid its application), many Europe-based stakeholders complained that new Section 899 would significantly impact historic investments in the U.S. and might impede further direct investment.
In late June 2025, after holding a series of negotiations with other countries, U.S. Treasury Secretary Scott Bessent made a request that the U.S. Senate remove Section 899 from the proposed legislative text since an agreement had been reached by the G7 countries to permit side-by-side coexistence of Pillar 2 and the U.S. tax system (including GILTI as currently configured, without country-by-country application) (the G7 Agreement). On June 28, 2025, representatives of the G7 issued a statement confirming the G7's commitment to this side-by-side arrangement and made explicit the point that the G7 Agreement is intended to "fully exclude U.S. parented groups from the UTPR and the IIR [i.e., the 'income inclusion rules'] in respect of both their domestic and foreign profits." What this means in practice, however, is not yet clear, as the G7 Agreement leaves to be worked out all material details, not the least of which is the agreement's durability since it merely is a statement of intent made by a small – but admittedly powerful – subset of the Inclusive Framework's membership.
Given the G7 Agreement, the final text of the Legislation does not include proposed Section 899. This act of legislative grace places significant trust in the capacity of the Inclusive Framework – and particularly, the member states of the European Union – to fully and effectively implement the spirit of the G7 Agreement in a timely manner. But this implementation may not be easy, since scope and dimension are not yet fully in view – e.g., there is the issue of whether it will only address UTPRs and IIRs, as indicated, or also involve matters like qualified domestic minimum top-up taxes and Pillar 2 rules order hierarchy – and divergent stakeholder views are anticipated given its potential impact on regional and global competitiveness and the future of Pillar 2. The European Union already appears to be awakening to these challenges, and delay appears inevitable, as delegates begin the struggle to define adequate implementation (e.g., is a safe harbor sufficient) and cracks begin to emerge as diplomats debate whether European interests are best served by continuing to rush headlong at Pillar 2 or, instead, "pause." In the end, a failure to timely implement the G7 Agreement is not an attractive outcome and may lead to a resurrection of Section 899 or its progeny in a subsequent reconciliation bill; key House and Senate leaders have already publicly declared that they "stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation."
With respect to DSTs, Section 899's exclusion from the Legislation is of more limited relevance since the Trump administration's trade policy already appears moderately successful in eliminating these revenue-based taxes that principally impact U.S.-headquartered digital service companies (e.g., social media platforms or digital advertising enterprises). The new global trade environment has recently inspired several countries (e.g., Canada, New Zealand, India) to withdraw or announce plans to eliminate their DSTs or DST analogs, and a recent European Union budget proposal appears to signal a retreat from recent efforts aimed at adopting a bloc-wide DST.
Conclusion
With the Legislation now enacted, businesses and investors engaged in cross-border activity should carefully evaluate the new law's impact on existing and anticipated operations and investments and assess whether current value chains and operating models may be enhanced to deliver higher returns by leveraging Legislation benefits. In addition, multinational taxpayers may want to consider whether structural changes to corporate organization charts (including through the domestication of non-U.S. enterprises) will lead to more competitive and certain tax outcomes and simplified tax compliance.
With respect to provisions included in the Legislation, multinational taxpayers should also turn their focus toward offering input as the Treasury Department and the IRS develop and issue implementing regulations. For instance, taxpayers may fairly ask whether there remains any utility to the maintenance of the subpart F regime now that the QBAI return has been eliminated from the GILTI regime.
Finally, multinational enterprises should stay abreast of G7 Agreement developments and should engage early and often with influencers and decision-makers to ensure that the implementation of that commitment is appropriate and robust.
There is likely to be one or more additional reconciliation bills during late 2025 and 2026 and therefore additional opportunities for enactment of additional provisions as well as changes, corrections and improvements to the Legislation. BakerHostetler will continue to assist clients in advancing their tax and federal policy objectives; challenging and, when necessary, litigating IRS enforcement missteps; and keeping our clients and friends updated on federal and international tax-related developments.
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.
