International tax: What to know about the new tax legislation

Numerous adjustments to international tax provisions have resulted from the passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. These changes primarily involve adjustments to tax rates, along with some nuanced revisions to calculation methods and reporting requirements.

Key observations for international tax

This legislation introduces several critical changes for taxpayers with operations abroad and U.S. entities with foreign parents.

Operations through controlled foreign corporations became incrementally more expensive for most

The new law made several changes to the regime formerly known as Global Intangible Low-Taxed Income (GILTI), including renaming it to Net Controlled Foreign Corporations (CFC) Tested Income (NCTI), effective for tax years beginning after Dec. 31, 2025. For applicable domestic C corporations and individuals who elect under the Internal Revenue Code (IRC) Section 962 to be treated as a corporation, the Section 250 deduction has been reduced from 50% to 40%.

Additionally, the haircut on the foreign tax credits attributable to the inclusion (i.e., the Section 960 credit) has been reduced from 20% to 10%. Overall, these changes result in an approximate effective tax rate of 14% compared to the historic 13.125%.

For the calculation of net deemed tangible return (NTDR), there were two changes. First, the NTDR deduction, which permitted taxpayers to deduct an additional 10% of qualified business asset investment (QBAI), was eliminated. Second, the increased Section 163(j) limitation — such as applying the 30% limitation to EBITDA, rather than EBIT — will permit taxpayers to utilize more interest expense to reduce NCTI inclusions.

For all applicable taxpayers, deductions allocable to NCTI for foreign tax credit purposes will be limited to only those directly allocable to the income. Note that directly allocable was not specifically defined in the new code sections and treasury regulations are expected to provide further clarity.

Other expenses, such as interest and research and experimentation (R&E), which were previously required by statute to be allocated the NCTI, will now be allocated exclusively to U.S. source income for the calculation of the foreign tax credit limitation.

For all taxpayers, the foreign tax credit for taxes paid in association with distributions made after June 28, 2025, of previously taxed earnings and profits (PTEP) related to NCTI will be limited to 90%.