Key international tax provisions in the Senate-approved bill

Removal of net deemed tangible income return (net DTIR): The original intent of the global intangible low-taxed income (GILTI) regime was to serve as a quasi-minimum tax on low-taxed intangible income generated by controlled foreign corporations (CFCs). The Senate bill pivots from this original intent by removing the intangible component and, as such, GILTI evolves into a minimum tax on most (if not all) CFC income. Specifically, under the Senate’s modifications, the reduction to net CFC tested income for net DTIR (10% of qualified business asset investment (QBAI) less specified interest expense) is eliminated thereby essentially removing any benefit provided by a CFC’s tangible assets as in the legacy calculation of GILTI. If passed as proposed by the Senate, GILTI (which is currently equal to net CFC tested income less net DTIR) would be referred to as net CFC tested income. This change would apply to taxable years beginning after Dec. 31, 2025.

• Consider: While this change simplifies the calculation of GILTI (or rather net CFC tested income), capital intensive taxpayers with ample QBAI that may have historically been able to avoid an additional tax on GILTI may prospectively find themselves subject to the minimum tax on a net CFC tested income basis.
• Consider: For U.S. multinational enterprise (MNE) groups with a mix of each high- and low-taxed CFCs, the elimination of net DTIR from the calculation should, where available, result in increased utilization of the high-tax exclusion election as there would no longer be an ability to use “excess” net DTIR of certain group CFCs to shelter the low-taxed income of other group CFCs under a given aggregate approach. This change could then result in additional tax due on the separate standalone income of those low-taxed CFCs as better aligns with the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two global minimum tax regime in helping facilitate broader negotiations and concessions reached around tax and trade on the global stage (see elimination of “revenge tax” further below).
• Consider: For U.S. individuals holding 10% or more vote or value of CFCs directly or indirectly through passthrough vehicles (e.g., domestic partnerships and S corporations), this change is anticipated to bring about an uptick in separate section 962 election planning, where perhaps the high-tax exclusion not otherwise applicable in effectively ameliorating deemed inclusion income to those U.S. individual shareholders in the first instance.
• Consider: Certain taxpayers may not have been required to conform CFC tax years to their own for U.S. tax reporting purposes due to the absence of a GILTI inclusion (e.g., as may have resulted from substantial QBAI). The proposed removal of net DTIR could likely result in the deemed inclusion of income, particularly for CFCs operating in low-taxed jurisdictions, thereby implicating the need to conform their tax years to that of their majority U.S. shareholder under section 898 conformity rules.
• Consider: The removal of net DTIR would work to eliminate associated untaxed earnings and profits (E&P) that might otherwise be eligible for a 100% dividend received deduction upon a later actual distribution of earnings.

Permanently increases post-2025 GILTI deduction to 40% (from 37.5%): The GILTI deduction (or rather net CFC tested income deduction) is proposed to be increased to 40% (49.2% in the earlier House-passed bill) on a permanent basis for taxable years beginning after Dec. 31, 2025, and would remove the currently enacted scheduled change that would permanently reduce the deduction to 37.5% (down from an enacted 50% deduction that currently applies before that scheduled change) for taxable years beginning after Dec. 31, 2025.

• Consider: The net CFC tested income effective tax rate would increase from a 10.5% GILTI rate to 12.6% (10.67% in the earlier House-passed bill which retained legacy GILTI with the subtraction for net DTIR) as a result of this proposed change, which is still more taxpayer favorable than the 13.125% effective tax rate that would result if the deduction percentage changes to 37.5% as scheduled.

Allowable deemed paid foreign tax credit increased to 90%: The Senate bill proposes to increase the allowable deemed paid foreign tax credit attributable to net CFC tested income from an 80% GILTI limitation (as retained in the earlier House-passed bill) to 90%. This change would apply to taxable years beginning after Dec. 31, 2025. Further, the Senate bill clarifies the disallowance for 10% of any foreign taxes paid (or deemed paid) with respect to any distributions of previously taxed net CFC tested income that is excluded from gross income. The disallowance will apply to amounts distributed after June 28, 2025.

• Consider: The increase in the allowable foreign tax credit attributable to net CFC tested income means that local country effective tax rates on that income must generally equal or exceed 14% (increased from 13.125%) to avoid the imposition of residual U.S. tax on such income.

Simplified expense apportionment: For the purposes of the foreign tax credit limitation, the Senate bill proposes (in a new change not included in the earlier House-passed bill) to limit expenses allocated to net CFC tested income, specifying that the expenses to be allocable are (i) the net CFC tested income deduction under section 250(a)(1)(B), (ii) no amount of interest expense or research and experimentation (R&E) expenditures and (iii) other expenses that are directly allocable to such income. This change would apply to taxable years beginning after Dec. 31, 2025.

• Consider: Under current law, taxpayers need to allocate and apportion U.S. stewardship, interest, research and development (R&D) and certain other expenses between different section 904 categories (e.g., general, passive, section 951A and foreign branch) for purposes of the foreign tax credit limitation. The proposed change may relieve some complexity and increase creditability for deemed paid foreign taxes attributable to net CFC tested income. Separately, any amount of interest expense, research and experimental (R&E) expenditures or other amount or deduction which would (but for the change) have been allocated or apportioned to net CFC tested income shall only be allocated or apportioned to income from sources within the U.S. This change then has the additional benefit of not reallocating these amounts to foreign source income in other section 904 categories further optimizing credit utilization.

Other considerations:

Section 174: The requirement to capitalize and amortize foreign research expenditures over a 15-year period remains as under currently enacted law and in the earlier House-passed bill. Taxpayers should continue to evaluate contract research activities performed by CFCs to determine if expenditures are currently deductible or subject to capitalization at the CFC level for purposes of calculating net CFC tested income.

Section 163(j): The Senate bill proposes to make permanent the temporary reversion introduced in the earlier House-passed bill of the adjustable tax income (ATI) limitation for interest expense deductibility to an earnings before interest, taxes, depreciation and amortization (EBITDA) basis, and removes a proposal from that earlier House-passed bill that would have broadened an exemption for certain small businesses from application of section 163(j) as results from the House-proposed increase in the gross receipts test of section 448(c) from a $25 million to $80 million aggregate threshold available to certain manufacturers. New to the Senate bill, and in potential opposition to increased interest expense deductibility in the calculation of net CFC tested income, is a proposal specifying that capitalized interest expense be treated as interest expense subject to the business interest expense limitation under section 163(j). Additionally, the Senate bill calls for the specific exclusion of net CFC tested income, subpart F and section 78 from the ATI calculation.

• Consider: While certain changes (i.e., EBITDA basis for ATI) could work to increase interest expense deductibility at the CFC level resulting in decreased tax liability attributable to net CFC tested income, others (i.e., the exclusion of GILTI, subpart F and section 78 amounts from ATI of U..S shareholders, the omission of the increased small business exception available to manufacturers and interest capitalization requirements) may hinder interest deductibility. Taxpayers need to consider how these changes may impact deductibility of interest expense at the U.S. shareholder and CFC levels.
• Consider: The ATI exclusion for GILTI, subpart F and section 78 amounts from ATI of U.S. shareholders may call into question the future of the ATI bump allowed to U.S. shareholders pursuant to a CFC grouping election under existing regulations.

Removal of deemed tangible income return: The intent of the foreign derived intangible income (FDII) deduction by TCJA was to provide a benefit to U.S. corporations who earn income abroad related to the use of U.S. intangible assets. In a new change from the earlier House-passed bill, the Senate bill pivots, again, by removing this intangible component that effectively serves to provide U.S. corporations a benefit for income from qualifying export activities whether from exploitation of intangible or tangible U.S. assets. Under Senate modifications, the 10% of QBAI threshold has been removed. Consequentially, the FDII deduction would be referred to as the foreign derived deduction eligible income (FDDEI) deduction. This change would apply to taxable years beginning after Dec. 31, 2025.

• Consider: More corporate taxpayers (especially those with substantial tangible assets in the U.S., and, separately, high volume/low margin businesses that hadn’t historically been able to derive much (if any) FDII benefit) may find themselves able to benefit from the enhanced FDDEI deduction in the absence of the QBAI hurdle.

Additional exclusions to deduction eligible income (DEI): As new modification excluded from the earlier House-passed bill, the Senate bill proposes that, except as otherwise provided by the Secretary, any income and gain from the sale or other disposition (including pursuant to a transaction subject to section 367(d)) of each intangible property (as defined in section 367(d)(4)) and any other property of a type that is subject to depreciation, amortization or depletion of the seller would be excluded from DEI in addition to other preexisting specified exclusions. This change would apply to sales or dispositions occurring after June 16, 2025.

• Consider: This proposal differs from an exclusion initially proposed in earlier Senate finance markup release in that it is not just limited to exclusion of income for sales or exchanges of property that produce rents or royalties but also captures a broader class of property sales or dispositions warranting a closer identification for common transfers recorded in the financials that, if occurring after the June 16 date, need to be backed out in calculating a taxpayer’s FDDEI deduction.

Permanently increase post-2025 FDII deduction to 33.34% (from 21.875%): The FDII deduction (or rather FDDEI deduction) is proposed to be increased to 33.34% (36.5% from the earlier House-passed bill) on a permanent basis for taxable years beginning after Dec. 31, 2025. This change removes the scheduled change that would permanently reduce the deduction to 21.875% (down from an enacted 37.5% deduction that currently applies before that scheduled change) for taxable years beginning after Dec. 31, 2025.

• Consider: The effective tax rate on post-2025 qualifying export activities would decrease to 14% (13.334% in the earlier House-passed bill) from the scheduled 16.406% effective tax rate.

More limited expense allocation and apportionment to DEI: The Senate bill (in a new change not included in the earlier House-passed bill) would only require the allocation and apportionment of directly related expenses to DEI. This change would be applicable to taxable years beginning after Dec. 31, 2025.

• Consider: Taxpayers would no longer be required to allocate and apportion certain expenses to DEI (e.g., interest and R&D), a favorable boost in calculating any FDDEI benefit.

Post-2025 BEAT rate decreased to 10.5% (from 12.5%): The BEAT rate is proposed to decrease to 10.5% (10.1% from the earlier House-passed bill) on a permanent basis from the scheduled 12.5% BEAT rate (up from an enacted 10% rate that currently applies before that scheduled change) and retains the higher rate of 11.5% applicable to banks and certain securities dealers for taxable years beginning after Dec. 31, 2025. Consistent with the earlier House-passed bill, the Senate bill also retains the current treatment of certain tax credits (e.g., R&D credits), whereby “regular tax liability” calculated for BEAT purposes would not be reduced by these credits as an otherwise scheduled change (with effect of increasing BEAT liability due) for taxable years beginning after Dec. 31, 2025.

• Consider: The Senate bill’s proposed extension of the current treatment of certain credits (consistent with the earlier House-passed bill) would be a needed win for in-scope taxpayers, particularly those with substantial R&D credits for which, absent this extension, could find themselves subject to increased BEAT liability. Foreign tax credit limitation adjustment for sales of U.S. produced inventory via a foreign sales branch: To alleviate an inherent double taxation issue arising from TCJA, the Senate bill proposes that for purposes of the foreign tax credit limitation and with respect to U.S. produced inventory sold via foreign sales branches, gross income from the sale of inventory property that is attributable to a foreign branch office or other fixed place of business (which would otherwise be sourced based on place of production alone under section 863(b)) will be treated as foreign source subject to a foreign “use” requirement and separate 50% limitation based upon total taxable income from the sale or exchange of such inventory property. This change would be applicable to taxable years beginning after Dec. 31, 2025.

Permanent extension of the CFC look-thru rule: The Senate bill permanently extends the applicability of section 954(c)(6) that provides an exception to subpart F for certain dividends, interest, rents and royalties received from related CFCs, which, absent this rule, could be treated as foreign personal holding company income. This change would be applicable to taxable years of foreign corporations beginning after Dec. 31, 2025.

• Consider: This proposal would provide taxpayers certainty around such intercompany payments after almost two decades of temporary extensions.

The demise of the one-month deferral exception for CFC tax years: The Senate bill reprises an earlier proposal from prior Build Back Better draft legislation to remove the one-month deferral exception that allowed CFCs to have taxable years that end one month earlier than their majority U.S. shareholder. This change would apply to specified foreign corporations (to which section 898 conformity applied and that which utilized the one-month deferral exception) with taxable years beginning after Nov. 30, 2025. Such specified foreign corporations will transition their U.S. taxable years by ending their next taxable year beginning after Nov. 30, 2025, with the required year-end date.

• Consider: Taxpayers that would be required to change their tax year due to the removal of the one-month deferral exception need to exercise caution on how the change in tax year will alter the credibility of foreign income tax on a fixed and determinable basis with respect to such specified foreign corporations. The method of allocating impacted foreign taxes will be prescribed by forthcoming regulations or other guidance provided by the Secretary (or a delegate thereof).

Section 958(b)(4) reinstated to prevent downward attribution: As previously proposed under an earlier technical corrections bill, and again, under Build Back Better, the Senate bill so too proposes the reinstatement of section 958(b)(4), which would serve to prevent the constructive ownership of CFC stock owned by a foreign person to a U.S. person through downward attribution. The Senate bill also revives Build Back Better’s proposed section 951B, which would subject certain “foreign controlled U.S. shareholders” (a U.S. shareholder without regard to section 958(b)(4) that owns more than 50% of the foreign corporation’s stock) of “foreign controlled CFCs” (a foreign corporation other than a CFC owned by a foreign controlled U.S. shareholder) to subpart F and GILTI (or rather net CFC tested income). These changes would be applicable to taxable years beginning after Dec. 31, 2025.

• Consider: While the reinstatement of section 958(b)(4) would generally serve to prevent constructive ownership through downward attribution from a foreign person, the proposed enactment of section 951B would, in certain circumstances, attribute ownership downwards from a foreign person to a U.S. corporation such as to treat such corporation as a section 958(b) constructive shareholder. However, only section 958(a) U.S. shareholders (those having ownership in the direct or indirect sense) would be subject to deemed inclusions of net CFC tested income and/or subpart F on the basis of such direct or indirect ownership.
• Consider: The reinstatement of 958(b)(4) would serve to obviate any unrelated direct or indirect U.S. shareholders (as defined under current regulations) from being subject to tax on net CFC tested income and/or subpart F income. This is a significant win for the large number of taxpayers that got swept into the subpart F and GILTI regimes as an unintended consequence of the earlier repeal of section 958(b)(4) and warrants a fresh look at the reporting posture for these affected taxpayers. It is interesting to note the delayed applicability date for this relief which, at a minimum, might have been proposed to apply with the 2025 calendar year that a number of these affected taxpayers share in common and in considering earlier efforts to provide this fix went further to even suggest that the earlier repeal of section 958(b)(4) might have been “void ab initio.”
• Consider: Foreign recipients of U.S. source fixed, determinable, annual, or periodical (FDAP) interest income that might have previously become ineligible for the portfolio interest exception (and thereby subject to 30% withholding tax at source in the absence of an applicable treaty claim that reduces that withholding) upon obtaining CFC status by reason of the earlier repeal of section 958(b)(4), might once again now be eligible for that exception upon reinstatement of section 958(b)(4).

Revision to the CFC inclusion pro rata rules: Under the Senate bill, the pro rata rules with respect to any inclusions of subpart F and GILTI (or rather net CFC tested income) would be amended to ensure U.S. shareholders who own a CFC at any point during the taxable year (rather than just the last day of the taxable year under current law) include their portion of any subpart F and net CFC tested income based on (i) the period of the taxable year such shareholder held the CFC, (ii) the period the U.S. person was a U.S. shareholder and (iii) the period the foreign corporation was a CFC. Any inclusions resulting from section 956 inclusion will be based on the U.S. shareholder(s) who hold(s) such stock on the last day of the taxable year. These changes would be applicable to taxable years of foreign corporations beginning after Dec. 31, 2025. The Senate bill includes transition rules for dividends paid or deemed paid with respect to such CFC to any other person during the year that could factor into any otherwise available reduction in pro rata share attended to those dividend payments.

• Consider: This proposal works to curb taxpayer planning around the elimination of deemed inclusion income through mid-year transfers ensuring that all U.S. shareholders who own a CFC at any point during the taxable year include their relative share of that CFC’s income for the taxable year. A byproduct of this change might naturally be a removal of the extraordinary reduction rules set forth under the section 245A regulations that work to except eligibility for a dividends received deduction for transfer or gain recharacterized as dividend under section 1248 for which there is an associated bail out of earnings from the U.S. tax fisc that would otherwise be included under the subpart F and/or net CFC tested income rules.

Omission of previously proposed section 899: With the Department of Treasury reaching an agreement with the other G7 nations for a proposed ‘side-by-side’ solution under which U.S. parented groups would be exempt from the income inclusion rule (IIR) and undertaxed profits rule (UTPR) of the OECD’s Pillar Two global minimum tax regime in recognition of the existing U.S. minimum tax rules to which they are subject, the so-called “revenge tax” (as included in the earlier House-passed bill and, in modified form since, an earlier Senate Finance markup release) inclusive of the “Super BEAT” provisions thereunder has been removed from the Senate bill.