Episode 7: The OBBBA’s Impact on International Tax

Transcript

IRIS LAWS

On this episode, we'll look into how the recently passed tax act, often referred to as the One Big Beautiful Bill Act, affects international tax contacts. We welcome Eric Flueckiger, a partner in the firm's international tax specialty practice, and Michael Cornett, the international tax leader in our Washington National Tax office. From your one stop for tax updates and analysis, I'm Iris

DEVIN TENNEY

And I'm Devin.

IRIS LAWS

It's Tuesday August 5th and this is Tackling Tax.

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IRIS LAWS

Well, Devin, it is never a dull moment around here is it?

DEVIN TENNEY

No, definitely not. I'm starting to think that maybe we should rename our show to Tackling Tariffs with as much tariff news as there is, for example, the new EU trade deal. But outside of tariffs, there's also the possibility of a second reconciliation bill, if you can believe it. So with that, let's dive right into our Fast Four stories of the week.

For our first story, let's dive right into the EU-U.S. tariff deal. Now, this deal is a bit more nuanced than just a flat rate across the board. And it comes on the heels of the U.S.-Japan trade deal from a couple of weeks ago. To reach this agreement, there were some concessions that had to be made on both sides.

For most EU exports, for example, there's going to be a 15% tariff rate that will be implemented on things like cars, semiconductors and pharmaceuticals. This deal also includes zero-for-zero tariffs, which means that neither side will impose tariffs on certain products that are going to include things like aircraft, certain chemicals, semiconductor equipment, natural resources, and certain agricultural products.

Additionally, steel and aluminum tariffs were discussed but there seems to be some variance in the announcements from both sides on exactly what this means, so more to come there. Further, energy cooperation will be increased with the EU purchasing more U.S. energy products. Now, ultimately, this deal was set up to implement a framework for future cooperation between the two jurisdictions.

IRIS LAWS

So when you say that though, Devin, does that mean that the 15% rate could be lower in the future or no?

DEVIN TENNEY

Yeah, it certainly does mean that. Now, Iris, I do have a question unrelated to tariffs. What is more beautiful than one big, beautiful bill?

IRIS LAWS

Oh, good grief. Well, so basically that leads us into our second story. I think you're trying to get at the fact that they're talking about a potential second reconciliation package later this year. Unofficially, we've seen it, at least one source being referred to as the “2 Big 2 Beautiful” bill. So, I think we're getting a little tongue in cheek there just with our naming.

But all of that to say, the talk has been that it might be late-fall time frame if this were to happen. But, you know, it could include things like technical corrections, some things that didn't make it into the One Big Beautiful Bill Act because of Byrd rule limitations. And in that sort of thing.

DEVIN TENNEY

All right, so a question: if it didn't make it into the One Big Beautiful Bill Act because of the Byrd Rule, why would things be different for the “2 Big 2 Beautiful” bill?

IRIS LAWS

Good question. I think the thought, right, is that they would probably redraft the provisions to address the concerns that the parliamentarian had with OBBBA. So, ultimately, it would pass this go around. Other things that could be in there are further changes to Medicaid and even some possible increases to the 199A QBI deduction that were originally considered in the OBBBA House version.

IRIS LAWS

So that would be an increase to the rate at 23% there.

DEVIN TENNEY

For our third item at the National Association of Enrolled Agents Tax Summit, which, by the way, sounds like a real barnburner. IRS Commissioner Billy Long said that the opening of the 2026 filing season isn't targeted until around President's Day. So this means the individuals and businesses alike will not be able to file until around February 17th, only a month away from the March 15th deadline for partnerships and other pass-through entities.

IRIS LAWS

So why is that, though? Do you know Devin? Is it based on changes with OBBBA or other reasons?

DEVIN TENNEY

As far as I know, they didn't really share any specifics, but I'd imagine that's probably a, you know, primary contributor. You know, it is tied to having to update forms, based on new rules and getting those changes coded with e-filing and such. So that probably is correct.

IRIS LAWS

It sounds like extensions might be in folks’ future here shortly. For our last story, last week the IRS adjusted corporate AMT guidance for partnership investments. The goal, per the interim guidance, was to simplify the application of the Corporate Alternative Minimum Tax to partners. Basically, there are now more methods for corporations trying to calculate their adjusted income attributable to their partnership investments.

Other things were included in the notice as well, things like reporting requirements and clarification that corporations can disregard income from non-realization events. The notice issued references that there will be proposed rules forthcoming on the topic as well. And with that, let's move on to our next segment, Planning Insights.

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IRIS LAWS

This segment we call Planning Insights, where we examine current events in the tax world and some of the resulting strategies. Today's Insights is all about international tax and how the One Big Beautiful Bill Act changed things in this space. We are so lucky to have Michael Cornett and Eric Flueckiger join us as our guests this episode. Welcome to the show, Eric and Mike.

MICHAEL CORNETT

Thanks, Iris, happy to be here.

IRIS LAWS

Well Mike, we'll go ahead and start with you. I was hoping could you just kind of set the stage for us a bit? You know, tell us what's been going on recently in the international tax world, maybe other than the One Big Beautiful Bill Act. You know, I hear a lot about Pillar Two, and, just was kind of wondering about how that and other things fit together, or influence each other, with the Act.

MICHAEL CORNETT

Yeah, certainly happy to talk about a couple things that are going on. One, like you say is the Pillar Two is still out there, even though Treasury and OECD/G7 say they're working to deal with, making sure the U.S. tax system is compliant with Pillar Two that's still in the works, waiting to see kind of what happens.

In the meantime, companies really should be still preparing to file reports and file their first tax returns next year under Pillar Two. But maybe by then we'll have an agreement which would hopefully exempt at least some U.S. multinationals from having to be subject to the Pillar Two rules there. So, I think, you know, that's a development that continues to watch, be watched.

And we'll have to see how it goes. I think the other thing, while you may not call it international tax is just tariffs. I mean, tariffs is definitely in the news and I think just keep an eye on it, with August 1st coming up, to see what President Trump's going to do next.

DEVIN TENNEY

That’s awesome Mike, thank you so much. Eric, I do want to talk about the Act that just passed. And I was wondering if you can maybe walk us through some of those provisions, but again, trying to keep it not too technical. Can you maybe just kind of give us some background on what the primary changes are and maybe, you know, are they good changes for taxpayers? Are they bad? Is it a wash? From a practical standpoint, what's it looking like?

ERIC FLUECKIGER

Yeah. I mean, generally the international tax provisions, I would say, are likely favorable for taxpayers. I think there are a lot of items in there that, you know, that are going to help from a foreign tax credit position from foreign derived intangible income deductions. And then also, just from an overall effective tax rate planning, especially if you layer on what we would call domestic provisions, section 174 deductions and 163J. But generally, I think for the most part it's going to create a need for modeling because I think there's a lot of interplay between all these provisions that's going to be required in order for us to really understand what the true impact is. And I think it's going to be on a fact-by-fact basis, on an entity-by-entity basis. It's not going to be the same answer for all taxpayers.

IRIS LAWS

So you know, you mentioned some of those changes just now. I think when we had talked previously there'd sort of been four groupings as you described. I have in my notes CFC Section 250, Foreign Tax Credit and BEAT, which all is a lot of international tax talk for things that I don't know a lot about. So I was kind of hoping we could tackle those groupings one by one. The first being CFC changes. So for those listening and maybe less familiar with international tax, what is a CFC exactly?

ERIC FLUECKIGER

So a CFC is a controlled foreign corporation. And I think at the highest level, you could define it as a foreign subsidiary that that a U.S. company owns. And there has to be at least 50% ownership by U.S. persons, by either U.S. individuals or a U.S. corporation. So, 50% ownership in a foreign subsidiary.

IRIS LAWS

And were U.S shareholders taxed on that income or not?

ERIC FLUECKIGER

Historically, there's been several ways that, that U.S. shareholders could be taxed on CFC income. It could be by either an actual distribution of earnings. So, a dividend that’s paid up, cash dividend paid up, from the foreign entity to the U.S. And there's also several complicated rules that generate deemed dividends or deemed inclusions of that CFC income that U.S shareholders would have to recognize on an annual basis.

IRIS LAWS

And that's regardless if they're an individual or a corp or...?

ERIC FLUECKIGER

Correct. Yeah, it would be for both corporations and individuals. The deemed inclusions can include subpart F income, which is it's been around since, I think the 1960s. And then there's also a newer, deemed inclusion rule called GILTI, Global Intangible Low Taxed Income, which was passed with the 2017 Tax Act. And then there's also section 956 deemed inclusions as well.

So those are the three items that could be picked up as income on an annual basis where the U.S. shareholder, whether it's a corporation or an individual, actually receives any cash from the from the foreign subsidiary.

IRIS LAWS

So that's kind of setting the base, right? What changed with the Act?

ERIC FLUECKIGER

Yeah. So GILTI has kind of been the focus, I think, since 2017. And the way GILTI works is each year a U.S. shareholder has to compute taxable income of that controlled foreign corporation or CFC. And then there is a, historically there's been a reduction of that income by 10% of the CFCs investment in fixed assets, net book value of fixed assets and that's referred to as Qualified Business Asset Investment or QBAI. So, with the new tax act that was passed, that 10% reduction of taxable income is no longer available.

So, there's no longer an exclusion for QBAI when determining GILTI on an annual basis for U.S. shareholders. Also, when a U.S. shareholder has to recognize the GILTI inclusion, corporations have historically been allowed to also reduce the inclusion by 50%. That’s a Section 250 deduction under GILTI that deduction is now going to 40%.

And there's a difference here between how corporations recognize GILTI and individuals recognize GILTI. So corporations like I said get a deduction under Section 250. That's now 40% of the GILTI inclusion. And there's also a deemed paid foreign tax credit available. That could offset any U.S. tax on that leftover residual inclusion after the 250 deduction.

MICHAEL CORNETT

Individuals do not get those benefits. So, individuals have to recognize GILTI in total and do not get a 250 deduction or a foreign tax credit unless a certain election is made to essentially treat the individual owner as if it were a corporation.

IRIS LAWS

Gotcha. So, thinking back now, okay, I'm a CFO. I'm thinking about my business. Is there anything, practically speaking, I know you mentioned modeling. You know, are there strategies around this or what should I, as a CFO, be thinking about?

ERIC FLUECKIGER

Yeah, be thinking about ways to mitigate your deemed inclusions under GILTI. I think, you know, possibly, you know, making a high-tax exception election. There's the ability to elect not to recognize GILTI inclusions if the effective tax rate in the foreign jurisdiction is above 90% of the U.S corporate rate.

So that's one way to help mitigate GILTI inclusions. And then also really understanding what the ultimate impact is from CFC income. So, what is it? What is the real tax impact after recognizing the income, recognizing the available deductions, and then also recognizing this, available foreign tax credit? So it really is getting a handle on it through a modeling exercise.

DEVIN TENNEY

Now there was a change that I became aware of. You know, I'm thinking like I felt guilty for not wearing my necktie, but no one else is. I don't have to be. But I've seen the term NCTI being thrown around. GILTI, NCTI. What's... are they the same thing or are they different?

Maybe Michael, do you want to hop in this? What changed in why did they make the change? Why...GILTI was kind of a fun name. It, you know, rolled off the tongue easily. Why are we having to call this NCTI now, if that's even what people are calling it?

MICHAEL CORNETT

Yeah. I mean, well, Eric kind of alluded to this removal of QBAI, the 10%, for the fixed assets. Taking that out, you've really changed the way the program works. So, therefore, you don't have this global low-taxed, or global tangible low-tax income anymore. It's all global income subject to tax. Its just a net CFC-tested income is now what is subject to tax. And so therefore GILTI doesn't technically exist anymore.

DEVIN TENNEY

So are people calling it NCTI then? Or is it still an unofficial term?

MICHAEL CORNETT

I think it's getting more accepted, but I think still nothing is official until I think we hear some more public speakers, but it is a catchy name, as you say, Devin.

DEVIN TENNEY

Yeah. So, my understanding though is overall is it just simplified things with GILTI then and just made it a somewhat easier calculation?

MICHAEL CORNETT

I mean, on the surface when you look at like Eric says, it looks like it is beneficial to you, you know, but again, you really do have to model the impact because there's so many things in this bill overall that impact the calculations, both on the domestic side and the foreign side, that until you model it, you don't know whether it's really going to be beneficial or not.

DEVIN TENNEY

Gotcha. Thank you.

IRIS LAWS

I mean, speaking of beneficial, right. Most people think of the foreign tax credit as something that's beneficial to them. What changes were there on that one, Eric?

ERIC FLUECKIGER

So, for the foreign tax credit, there are some changes related to the recognition of foreign source income when you have a U.S. manufacturer who's selling U.S.-made, U.S.-produced goods through a foreign branch. So, a foreign subsidiary that is treated as a disregarded entity or a true foreign branch.

So, in that situation, you have 50% of the income that's generated from that activity that's in the U.S. is actually allowed to be treated as foreign-source income in the foreign-branch category. So that could help taxpayers who have been historically, limited in the foreign-branch category. For foreign tax credit purposes, you get income that really isn't tied to any real foreign tax there. But it's still treated as foreign-source income.

So that's a positive. With GILTI or NCTI now or NCTI however you want to call it, you know, in the foreign tax credit, historically there's been a 20% haircut, for the amount of taxes available. So the foreign taxes that are paid by that CFC, you only get to include 80% of those foreign taxes in your foreign tax credit analysis to offset any U.S. tax on your deemed inclusion.

That has been increased to 90% now. So, the haircut has been decreased there. So, there's also been changes to the amount of foreign taxes available, when an actual distribution is made from a CFC that is of earnings that have already been taxed in the U.S. So previously taxed earnings and profits, those distributions may be subject to foreign withholding tax.

And before the the new act was passed, the 2025 act was passed., there was no limitation on the amount of withholding tax that would be available for foreign tax credit purposes. Now, there's a limitation of 10% of the amount of foreign taxes available. So, similar to the 10% haircut on the deemed paid credit, there's now a 10% haircut on withholding taxes for NCTI PTIP.

DEVIN TENNEY

Mike, I want to move over to you and talk about the section 250. Doesn't seem like there's a flashy acronym here, but what is section 250? What do we need to be aware of there?

MICHAEL CORNETT

Yeah, I think on the 250, you know, Eric kind of mentioned part of it as it related to the GILTI or NCTI that there's a 250 deduction that applies to that type of income.

But in general, high-level, 250 was a deduction created when the TCJA passed to help reduce certain types of income, reduce the effective tax rate on that income by giving special deductions to U.S. corporations. So like, as Eric said on the GILTI side for that type of income that got picked up, you got a 250 deduction, which kind of brought the tax rate down, and made income around 10.5%.

The other basket of income, which goes by the acronym of FDII or in the new world it's going to be FDDEI. Because again, the change in that 10% of the fixed assets that is the income that a U.S. corporation earns from, you know, what I'll call export sales, export services, royalties from, you know, foreign persons, all unrelated so that, you know, encouraging U.S. companies to do things in the U.S. and because it's coming from foreign sources so to speak, you know, foreign payors, then the U.S. government said, or Congress said, let's, you know, give a 250 deduction for that income as well.

And that effectively kind of brought the rate down to 13.125% under the original law. So what's kind of happened here they've made some changes to that, with, you know, the way they allocate some expenses and doing the calculation, they did lower the deduction on FDDEI, they've made some again, some minor adjustments, you know, so effectively the effective tax rate now today's around 14%.

So still, you know, a great benefit for companies to make sure they're capturing all those, you know, sales, services, royalties into that calculation. Again, you know, when you look at you say, hey, it's a very positive change when it's in isolation, but because of other changes, whether, you know, to 174, 163J, bonus depreciation, you know, it all comes back to you need to model to see what kind of impact you really have on that. And what choices you need to make.

IRIS LAWS

Well, that's a lot. I think we've covered three of our four buckets. Last but not least, Mike, we'll stick with you. How about BEAT? What's changed?

MICHAEL CORNETT

BEAT, Base Erosion Anti-Avoidance Tax is probably the one that had the least amount of changes of the three. Basically, it increased the rate from 10 to 10.5%. Made it permanent at that 10.5% rate. And then it took away a provision that most people consider harmful here. In 2026, you were going to lose the ability to use certain credits like R&D in your BEAT calculations.

But they took away that exclusion. So now you're back to still having full credits available for that. So, I mean, the BEAT was in itself very, you know, I would say very helpful changes even though the rate went up a little bit. Again, we had similar issues. Depending on what you do in other code sections, you know, you may actually put yourself into a BEAT situation. So, you really... it gets back to what I like to say. It's modeling.

IRIS LAWS

Cool. Well, Eric, I know there's...we have now the act, but is there going to be regs coming out that need to iron out some of the gray areas here? Like do we think there's going to be more guidance coming or is kind of what we have what we have?

ERIC FLUECKIGER

Oh yeah, I think there needs to be more guidance. We'll see regulations, I think, at some point. You know, thinking back, there's still quite a few questions on several of these provisions. You know, I think about section 250 deduction and changes to our expense allocation and apportionment. There’s a lot of questions around that that I think will be helpful with regulations, with clarity, and then going through the process of feedback and responses from taxpayers as well.

IRIS LAWS

Great. Well, Mike, I think to wrap this up, the one word that I keep hearing from you is modeling, modeling, modeling. Is that right?

MICHAEL CORNETT

Yeah, it really is. Right. I mean, you know, there's so many provisions in this bill, you know, that were, you know, made from it, whether it's bonus depreciation or whether it's the R&D expensing. Again, whether it's 163J limitations, you know? Those will all impact the decisions you make. They will impact all the changes that have happened in the international space.

Whether it's GILTI, you know, FDII to 250 deduction. And the only way I think you can make an informed decision instead of just saying, hey, I'm going to choose to expense R&D and make up for everything there. I think you're going to have to do some modeling just to see what the impact is. Again, you could do something positive on one side and do something negative on the other and not having a good answer, that any, and particularly looking forward, you know, cause maybe some of the changes like 163J bonus depreciation, R&D expensing, those are effective this year, for your 2025 tax year.

Most of these changes to the international provisions are effective next year. But decisions you make this year will impact those next year as well as your current year calculations as well. So it really is kind of a double whammy as it relates to the international.

IRIS LAWS

Great. Well, thank you both for your time. I know Devin and I really appreciate you coming and we'll be looking to have you back here soon if you'll let us.

MICHAEL CORNETT

Thank you for having us. We look forward to coming back.

ERIC FLUECKIGER

Thank you.

DEVIN TENNEY

Thank you both.

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DEVIN TENNEY

Each episode we’ll bring you what we call a Focused FORsight of the week: an article or recording that might be of interest to you. This week's Focused FORsight is an article that expands on our conversation from today, and it's called “International Tax Rebranded: Key Items in the Reconciliation Bill.” And it can be found on our Washington National Tax Office website. Of course, you can always access our FORsights on the Forvis Mazars U.S. website more broadly.

IRIS LAWS

And that's our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast on August 19th. Until next time...

ANNOUNCER

The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.

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