From FTC to BEAT: Understanding the Future of International Tax After H.R. 1

At a glance:  

• The main takeaway: The enactment of the One Big Beautiful Bill introduces significant changes to provisions that will impact key international tax provisions, such as the Foreign Tax Credit, Base-Erosion and Anti-Abuse Tax, Net CFC Tested Income (formerly GILTI), and Foreign-Derived Deduction Eligible Income (formerly FDII).
• Impact on your business: These changes will have substantial implications for multinational corporations, requiring careful planning and adjustments to tax strategies.  
• Next steps: Aprio’s tax advisors are proactively monitoring tax legislation developments and are prepared to help you navigate the potential changes. 

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With the enactment of the One Big Beautifull Bill (OBBB), also known as H.R. 1, comes significant amendments to the tax code related to international tax provisions including the:

• Foreign Tax Credit (FTC)
• Base-Erosion and Anti-Abuse Tax(BEAT)
• Net CFC (Controlled Foreign Corporations) Tested Income (formerly known as Global Intangible Low-Taxed Income (GILTI))
• Foreign-Derived Deduction Eligible Income (FDDEI) (formerly known as Foreign-Derived Intangible Income (FDII)).

Previous versions of the bill also included adding a “Revenge Tax” against citizens and business of countries that impose taxes that the administration claimed disproportionately affected U.S. citizens. However, this provision was removed from the final version of the bill that was enacted.

Foreign Tax Credit

Internal Revenue Code (IRC) §904, which provides guidelines for calculating taxable income for purposes of computing the limitation of the foreign tax credit, has been amended to include additional guidelines and restrictions for calculating taxable income from foreign source net CFC tested income (formerly known as GILTI). The newly added guidelines and restrictions, which are applicable to tax years beginning after December 31, 2025, are as follows:

• Any deduction allowed under Section 250(a)(1)(B) shall be allocated and apportioned when determining the net CFC tested income for purposes of determining taxable income to calculate the FTC limitation. The deduction allowed under 250(a)(1)(B) is generally 40% of the net CFC tested income (as amended by the One Big Beautiful Bill).
• No interest or research and experimental expenses will be allocated when determining the net CFC tested income for purposes of determining taxable income to calculate the FTC limitation.
• Any other deduction related to the net CFC tested income can be allocated for purposes of determining taxable income to calculate the FTC limitation, only if it is directly allocable to the income.
• Any amounts or deductions which are not mentioned above will only be allocated or apportioned if the income is from sources within the U.S.

Overall, shareholders of CFC’s could see their foreign tax credits increase because of these modifications.

Sourcing Rules for Inventory Produced in the U.S.

Section 904(b) is further amended by adding an additional paragraph that clarifies the sourcing rules for inventory produced in the U.S. and sold through foreign branches. This applies to U.S. persons who maintain an office in a foreign country and sell inventory produced in the U.S. to customers outside of the U.S. from the foreign office. In this scenario, the bill deems that the sales will be treated as foreign sales. However, the amount treated as foreign sales should not exceed 50% of the total income from selling the specified inventory. This modification is applicable for taxable years beginning after December 31, 2025.

Modifications to Deemed Paid Credits and Foreign Tax Credit Limitations 

The bill also modifies how to determine the deemed paid credit for taxes properly attributable to tested income for taxable years beginning after December 31, 2025. Section 960(d)(1) is amended to:

• Increase the foreign income taxes deemed paid from 80% to 90% of the product of the domestic corporation’s inclusion percentage multiplied by the aggregate tested foreign income taxes paid or accrued by CFCs.
• Disallow a foreign tax credit related to distributions of previously taxed net CFC tested income. Specifically, the bill states that no credit shall be allowed for 10% of any foreign income taxes paid or accrued related to the previously taxed income.

Overall, these changes could lead to a larger foreign tax credit allowable for U.S. shareholders of foreign corporations.

BEAT Rate of Taxation 

The base-erosion and anti-abuse tax (BEAT) was introduced as a minimum tax that must be paid by certain U.S. companies making payments to foreign related parties in addition to any other taxes the U.S. company is subject to. The BEAT tax aims to prevent companies from offshoring profits and lowering taxable income in the U.S. Under the TCJA, the BEAT rate of taxation was 10% of a taxpayer’s modified taxable income and was scheduled to increase to 12.5% in taxable years beginning after December 31, 2025. The new bill amends Section 59A to permanently increase to 10.5% instead of 12.5% in taxable years beginning after December 31, 2025.

Foreign-Derived Deduction Eligible Income & Net CFC Tested Income

GILTI and FDII were both enacted to the tax code by the Tax Cuts and Jobs Act (TCJA) of 2017 as a part of an international tax reformation designed to encourage businesses to invest in the U.S. rather than abroad. Some of the most notable sections of the international tax overhauls within H.R. 1 are the name changes that apply to GILTI and FDII. Effective in taxable years beginning after December 31, 2025, H.R. 1 renames:

• Global Intangible Low-Taxed Income (GILTI) to net CFC tested income
• Foreign-Derived Intangible Income (FDII) to Foreign-Derived Deduction Eligible Income (FDDEI)

Changes to FDII and GILTI Deductions

The FDII deduction was originally set to 37.5% of the foreign-derived intangible income of the domestic corporation under the TCJA and scheduled to reduce to 21.875% in taxable years beginning after December 31, 2025. The GILTI deduction was set to 50% of the global intangible low-taxed income under the TCJA and scheduled to reduce to 37.5% in taxable years beginning after December 31, 2025.

However, the OBBB amends the text of section 250(a) to reduce the FDII deduction, now called the FDDEI deduction, to 33.34% and reduce the GILTI deduction, now called the net CFC tested income deduction, to 40% in taxable years beginning after December 31, 2025. While the deduction rates are still scheduled to decrease after 2025, these decreases are less harsh than what was originally scheduled by the TCJA and will be more favorable to taxpayers qualifying for these deductions.

Modifications to FDDEI Calculation

The bill also modifies a few important components for calculating FDDEI (formerly FDII). The deduction eligible income definition has been modified by an additional subclause to the list of items that are excluded from determining deduction eligible income. The subclause added excludes any income and gain from the sale or other disposition of intangible property and any other property that is subject to depreciation or amortization.

Under previous law, the income from property sales was notably included in the calculation of the FDII deduction so the impact of the provision amendments will vary depending on the type of income that corporations have on a year-to-year basis. These amendments will apply to any sales or dispositions occurring after June 16, 2025.

Exclusions from Deduction Eligible Income

Additionally, Section 250(b)(3)(A)(ii), which states that the deductions (including taxes) properly allocable to the gross income of the corporation can be subtracted from deduction eligible income, is amended to exclude interest and research and experimental expenditures from being eligible expenses when determining FDDEI. The effective date for this amendment is for taxable years beginning after December 31, 2025.

Simplification of GILTI Calculation

Under previous law, GILTI income, now referred to as net CFC tested income, was calculated as the excess of a shareholder’s net CFC tested income for the taxable year over the shareholder’s net deemed tangible income return for the taxable year. However, the new bill amends Section 951A by eliminating paragraphs (b) and (d). The effect of these eliminations is that the GILTI calculation is changed to equal the net CFC tested income and removes any consideration to net deemed tangible income return for the taxable year. Not only does this simplify the calculation for the GILTI deduction and income inclusions, but it also is expected to significantly change the amounts of inclusions and deductions that are calculated for taxpayers.

Other Notable International Tax Reforms

The One Big Beautiful Bill adds several other modifications to the tax code that impact international tax provisions.

• Section 954(c)(6)(C) which was set to expire for taxable years beginning after December 31, 2025 has been amended to remove the expiration date and will be made permanent. Section 954(c)(6)(C) applies to look-thru rules for income received from related controlled foreign corporations. Since the rules have been in effect since 2006, the impact from removing the expiration date should be minimal.
• Section 898(c) has been amended and now indicates that specified foreign corporations, which are CFCs where a U.S. person owns more than 50% of total voting power or value of stock, are no longer allowed to have a year that is one month earlier than the majority of U.S. shareholders tax year. They also must have the same tax year as the majority of U.S. shareholders now. Specified foreign corporations required to change their tax years will begin to do so after November 30, 2025 and will receive transition guidance from the U.S. Secretary of State.
• The rules regarding downward attribution of stock ownership (stock owned by a foreign entity, estate or trust, is considered owned by its shareholders) under Section 958(b) have been amended to clarify that under 318(a)(3), the attribution rules for partnerships, estates, trusts, and corporations will not be applied to consider a U.S. person as owning stock owned by someone who is not a U.S. citizen. Additionally, the bill introduces a new section called Section 951B, which outlines the amounts includable in gross income for foreign controlled U.S. shareholders. This amendment is effective for taxable years beginning after December 31, 2025.
• Section 951 subsection (a) has been rewritten to more specifically define who must include the income of a CFC with their taxable income on their tax returns, and the applicable taxable year. The tax year is now based on the tax year of the CFC and applies to taxable years beginning after December 31, 2025.

The bottom line

The changes to international tax provisions — the Foreign Tax Credit (FTC), Base-Erosion and Anti-Abuse Tax (BEAT), Net CFC Tested Income (formerly GILTI), and Foreign-Derived Deduction Eligible Income (FDDEI) (formerly FDII) — will have substantial implications for multinational corporations. Careful planning and adjustments to tax strategies will be required to comply with the new regulations.

Aprio’s tax advisors are continuously monitoring tax legislation and can help you navigate these changes.

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