By Anthony N. Verni, Attorney at Law, CPA
Series: International Tax Reform 2025 – Part 1 of 6
The Post-TCJA Legacy and Why 2025 Matters
When Congress enacted the Tax Cuts and Jobs Act (TCJA) in 2017, it overhauled how the United States taxes foreign earnings. The goal was to move from a “worldwide” system toward a quasi-territorial regime—granting a dividends-received deduction under §245A while introducing two powerful anti-base-erosion tools: Global Intangible Low-Taxed Income (GILTI) under IRC §951A, and Foreign-Derived Intangible Income (FDII) under IRC §250.
For nearly a decade, practitioners have wrestled with their mechanics and interaction. But with the One Big Beautiful Bill Act (OBBBA) of 2025, both regimes have changed again—forcing advisors to revisit every assumption about tested income, deduction percentages, and cross-border planning.
GILTI 101 – A Quick Refresher
GILTI requires U.S. shareholders of controlled foreign corporations (CFCs) to include in income their share of “tested income” above a deemed 10% return on qualified business asset investment (QBAI).
Formula (simplified): GILTI = (CFC tested income – CFC tested loss) – (10% of aggregate QBAI)
The result is taxed in the U.S., with a partial §250 deduction and a foreign-tax-credit (FTC) offset under §960.
OBBBA Update (Effective 2026):
– The §250 deduction for GILTI (now renamed Net CFC Tested Income, or NCTI) falls from 50% to 40%.
– The effective U.S. rate on GILTI rises from about 10.5% to 12.6% (before FTCs).
– The FTC haircut under §960(d) is reduced from 20% to 10%, modestly increasing usable credits.
Practice Insight:
Many multinational structures built between 2018 and 2022 were tuned to the old 50% deduction. Model your clients’ 2026 tax years now, especially those with low-taxed CFCs, to gauge new inclusion levels and cash-tax impact.
FDII – The Domestic Counterpart
FDII was Congress’s attempt to reward U.S. corporations that serve foreign markets with U.S.-based intangibles. A domestic C-corp calculates its deduction-eligible income (DEI), subtracts a deemed tangible return on QBAI, and identifies the portion attributable to foreign-derived sales and services (FDDEI). The remainder is its foreign-derived intangible income.
OBBBA Update:
– FDII is re-branded Foreign-Derived Deduction-Eligible Income (FDDEI).
– The §250 deduction drops from 37.5% to 33.34%, raising the effective rate from roughly 13.1% to 14%.
– Documentation standards tighten: taxpayers must substantiate foreign use and foreign payer status for each transaction.
Practice Insight:
Attorneys reviewing export-driven or SaaS businesses should confirm whether documentation meets Treas. Reg. §1.250(b)-4. The IRS has stepped up FDII audits, focusing on proof of “foreign person” status and end-use outside the United States.
Key Technical Interactions
A. Expense Allocation and FTC Capacity: Under §861 et seq., R&D and interest expenses reduce foreign-source income and can erode FTC limitations. The 2025 rules slightly ease allocation pressure by reapportioning certain interest deductions to U.S.-source income, restoring credit room for many taxpayers.
B. High-Tax Exception Coordination: The GILTI High-Tax Exclusion (Treas. Reg. §1.951A-2(c)(7)) still applies, but the OBBBA’s rate increase makes fewer CFCs eligible. Taxpayers should retest effective foreign tax rates.
C. Section 163(j) Interaction: Foreign inclusions such as §951A and §78 gross-ups are now excluded from Adjusted Taxable Income for interest-limitation purposes—loosening §163(j) constraints for some groups.
Structuring and Planning Re-Evaluations
Entity and Check-the-Box Planning: Many groups elected to disregard entity status abroad to blend losses or avoid Subpart F. The new 40% deduction reduces the value of that strategy. Re-examine whether hybrid branches still make sense.
Location of Intangibles: With FDDEI documentation tightening and Pillar Two regimes taxing low-tax IP boxes, migrating intangibles back to U.S. entities can sometimes lower global ETRs.
Timing & Transitional Years: Calendar-year taxpayers should model both 2025 (pre-effective) and 2026 (post-effective) results. Accelerating income or deductions may yield one-time advantages before the rate shift.
Compliance and Documentation Risks
Form 5471 Accuracy: Ensure tested income and QBAI calculations reflect new definitions.
§250 Computation Workpapers: retain export invoices, customer certifications, and proof of foreign use.
Transfer-Pricing Support: review cost-sharing and intercompany royalties—the IRS often challenges FDII positions as thinly substantiated transfer-pricing adjustments.
Litigation and IRS Examination Trends
Examiners under IRM 4.61 (International Exam) evaluate tested-income pooling, foreign-use documentation for FDII, and interaction between §250 and §904 FTC limitations. Expect more LB&I campaigns focusing on FDII substantiation failures and improper high-tax-exclusion elections.
Looking Ahead – Global Minimum Tax Pressures
While the U.S. has stepped back from OECD Pillar Two participation, many trading partners have not. Their 15% ‘top-up’ taxes can neutralize low-tax GILTI planning. Practitioners should watch for treaty overrides or non-creditable ‘qualified domestic minimum top-up taxes.’
Checklist for 2025–2026 Implementation
✓ Model §951A inclusions under new 40% deduction
✓ Review FDDEI documentation
✓ Test CFC effective rates
✓ Update §861 expense allocation
✓ Re-forecast FTC utilization
✓ Coordinate with §163(j) modelling
✓ Prepare for LB&I data requests
Conclusion
The 2025 international tax amendments mark the second great reset of the post-TCJA era. The headline rates may appear modestly higher, but the structural implications are far-reaching. Attorneys and CPAs must re-model every multinational client’s exposure and documentation process before the new regime takes effect.
