July 17th, 2025
Important Tax Provisions of the Tax Cuts and Jobs Act of 2017 Made Permanent: Part Two: International Tax Provisions

This is the second of two posts on the One Big Beautiful Bill Act that was just passed by the Congress and signed into law by President Trump on July 4, 2025. The first post identified some of the more important provisions that affect owners of privately owned business. This second post focuses on the international tax law provisions of the OBBB including provisions that were enacted in TCJA 2017 and rumored for termination but survived. A more in-depth summary of the OBBB covered in both posts will be appearing shortly in Corporate Taxation (WG&L) and RIA Checkpoint, Jerald David August, Editor-in-Chief, Columnist on Cross-Border Developments

On July 4, President Trump signed into law the budget reconciliation bill, Pub. L. No. 119-21, which further extended or otherwise made permanent favorable tax provisions enacted as part of The Tax Cuts and Jobs Act of 2017 (“TCJA 2017”), Pub. L. No. 119-57. (https://www.congresss.gov/bill/119th-congress/house-bill/1/text as amended by the Amendment to Rules Committee Print 119-3). Many of the favorable provisions of TCJA 2017 had already been phased-down or were otherwise due to expire at the end of this year. For individual taxpayers, the “OBBB” permanently reduces individual income tax rates, increases the standard deduction as well as provides for a more generous child tax credit. Congress retains the estate tax but increased the lifetime transfer tax exemption for individuals for estate and gift tax (and also for generation skipping transfer tax purposes). Most of the provisions in TCJA 2017 affecting individuals were scheduled to expire in 2025. This includes the items referred to in the preceding paragraph as well as other particularly important provisions relating to the deductibility of state and local income, sales and property taxes, the immediate expensing of certain depreciable property, expensing of certain research and development costs and reduced rates of tax on certain levels of qualified business income.

The OBBB: Keeping TCJA 2017 International Tax Reforms in Place

In General

The international tax law changes enacted into law by the TCJA 2017 reflect the adoption of a territorial based system for income taxation of U.S. companies, including U.S. subsidiaries of foreign corporations. Congress tried to do several "big" things in the cross-border context. First, it wanted to force repatriation, a/k/a "onshoring", of foreign accumulated (and untaxed) earnings and profits generated after 1986. All U.S. persons would be required to include in gross income under the subpart F regime, i.e., a rule of income inclusion, to include their share of such foreign accumulated earnings and profits for tax years commencing in 2017 payable at lower rates and where elected, over a period of years subject to applicable rules. Welcome to the transition tax in Section 965. Second, Congress wanted to adopt a participation exemption rule like many treaty countries have which facilitate a U.S. parent corporation to repatriate the earnings of a foreign subsidiary on a non-taxable basis. This is the design of Section 245A also discussed below. But then to prevent future offshoring of non-subpart F (and non-PFIC) income, Congress enacted Section 951A which requires U.S. shareholders of a controlled foreign corporation to include their pro rata share of active foreign business income and include it in U.S. taxable income whether distributed or left offshore. As with subpart F, future distributions of previously taxed income would not be taxed again in accordance with the PTEP rules contained in Sections 959-962. What could previously be treated as blocked foreign income not presently subject to U.S. income tax would now be required to be currently included in gross income by every U.S. shareholder of the CFC. Section 245A would not apply for required income inclusions under the subpart F or the new income inclusion rule in Section 951A. See Section 959(d). Then there was an export sale and services incentive provided in Section 250, foreign-derived intangible income ("FDII") in reducing the rate of tax but only to domestic C corporations to approximately 13.5 to 14% instead of 21 percent. The reduction from 34/35% to 21% rate to C corporations is a big deal and it has served as an added important factor in engaging in cross-border tax planning. Unincorporated domestic entities and sole proprietors are not treated that well by the U.S. although there may be merit to structures that produce favorable results for unincorporated businesses engaged in international business operations.

TCJA also repealed the corporate alternative minimum tax and replaced it by the Base Erosion and Anti-Abuse Tax (BEAT) under Section 59A of 10% (5% for years beginning in calendar year 2018) of a corporation's modified taxable income (excluding, for example, certain payments made to related foreign parties) in excess of its regular tax liability less certain credits in accordance with Section 59A(a)(1). The OBBB increased the BEAT to 10.5% permanently and reduces the base erosion percentage threshold from 3% to 2%. Only large taxpayers are subject to BEAT, i.e., average of over $500 million in gross receipts over the prior three years.

The 21% flat corporate income tax rate announced in TCJA 2017 is in marked contrast to the maximum non-corporate income tax rate of 37%, which was reduced by 6.6% from 39.6%. For U.S. shareholders required to report a gross income inclusion under Section 951(a)(1) with respect to Subpart F income, or with respect to a GILTI income inclusion under Section 951A(a) such foreign-source income is taxed as ordinary income. For non-C corporation taxpayers, including partners in a partnership or shareholders in an S corporation, Subpart F income or GILTI income is subject to a maximum rate of tax of 37%. For a U.S. shareholder of a controlled foreign corporation (CFC) that is a domestic corporation, the tax rate is 21% as previously mentioned. There are direct and substantial tax incentives for owners of U.S. business to engage in foreign business operations and sales/services activities through domestic corporations or through certain partnership structures in order to benefit from the lower tax rates and deductions for foreign source business income. The OBBB does not change the new cross-border playing field that Congress enacted into law in TCJA 2017.

Section 965: Transition to Territorial Tax System. Congress wanted to require the tax repatriation in 2017 of all of the deferred and untaxed accumulated earnings and profits of controlled foreign corporations owned by U.S. persons. It had been reported that as much as $3 trillion of accumulated and untaxed foreign earnings and profits were outstanding in 2015. In response, Section 965 was enacted in the TCJA 2017 and required, for the last taxable year beginning before January 1, 2018, any U.S. shareholder of a deferred foreign income corporation (DFIC), to include in gross income as a "deemed inclusion" under Section 951(a), its pro rata share of the accumulated post-1986 accumulated and untaxed foreign earnings and profits of the DFIC. The amount included was subject to a lower rate of tax of 15.5% for cash and 8% for other assets. The U.S. Supreme Court upheld the constitutionality of Section 965 in Moore v. United States, 144 S.Ct. 1680 (2024).

Section 245A: Participation Exemption. In adopting a form of “participation exemption” that has been in place in various countries for years, TCJA 2017 permits U.S. corporations owning 10% or more of the stock of a foreign subsidiary to qualify for 100% dividends received deduction (DRD) for dividends sourced from foreign income other than derived by a passive foreign investment company as defined in Section 1297 that is not otherwise the subject of an income inclusion rule under Section 951(a)(1)(subpart F inclusion) or Section 951A (GILTI inclusion), or a income inclusion required under Section 965 or Section 956. Countries having a participation exemption include: (1) Austria; (2) Belgium; (3) Ireland; (4) Luxembourg; (5) Malta; (6) Netherlands; (7) Norway; (8) Portugal; (9) Italy; (10) Sweden; and (11) the United Kingdom. Ireland may enact a dividend participation exemption starting in 2025. While this may have been a parallel type of regime that Congress had in mind with G7 allies and trading partners, the width of Section 245A, particularly after the enactment of Section 965 and GILTI in Section 951A, combined with long-standing (1962 to present) Subpart F income inclusions, do not produce the same outcomes. Still some jurisdictions will have controlled foreign corporation rules such as the U.S. may yield outcomes that are more consistent with the outcomes produced in accordance with TCJA 2017 taxation of U.S. shareholders of CFCs.

A recent post on this site discussed Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 163 T.C. No. 4 (August 2024) which case involved the integration of Section 245A, the onshoring of post-1986 accumulated foreign earnings and profits under Section 965, and the gross-up of foreign taxes paid under Section 78. The question was whether the foreign tax gross up dividend amount under Section 78 qualified for the Section 245A 100% dividends received deduction as well as foreign tax credits. The Tax Court held that the gross amount dividend under Section 78 was eligible under the facts for the Section 245A DRD but in doing so, Section 245A(d)(1) disallows foreign tax credits to the extent attributable to amounts treated as dividends under Section 78 and then reports as non-taxable under Section 245A. See August Tax Law, Blog Post March 7th 2025. Tax Court Allows 100% Participation Exemption Deduction in Varian Medical Systems, Inc. And Explains Scope of Section 245A – August Tax Law, P.C.

As hoped for, Congress did not change Section 245A in the OBBB and it remains intact as enacted in TCJA 2017.

Section 951A: Global Intangible Low-Taxed Income ("GILTI") Inclusion. Under the GILTI rules, a U.S. Shareholder of any CFC must include in gross income for a tax year its global intangible low-taxed income in a manner that strongly resembles income inclusions of Subpart F income. See Section 951A. As to a U.S. Shareholder, GILTI is the excess (if any) of the shareholder's net CFC tested income over the shareholder's net deemed tangible income return. The U.S. Shareholder's net deemed tangible income return is an amount equal to 10% of the aggregate of the shareholder's pro rata share of the qualified business asset investment (“QBAI”) of each CFC with respect to which it is a U.S. Shareholder. The U.S. shareholder's GILTI inclusion amount is calculated based on certain items – such as tested income, tested loss, and QBAI – of each CFC owned by the U.S. shareholder (tested items). The stock attribution rules under Section 958 apply for purposes of determining whether a foreign corporation is a CFC and also for purposes of determining whether a person is a U.S. Shareholder under Section 951(b). Section 960(d) explains that where a gross income inclusion under GILTI occurs under Section 951A, the domestic corporation shareholder will be deemed to have paid foreign income taxes equal to 80% of the product of the corporation's “inclusion percentage” multiplied by the “aggregate tested foreign income taxes” included in the tested income group in each Section 904 category of the CFC or CFCs. Section 961(a) provides that basis in stock held by a U.S. Shareholder of a CFC is increased by the amount required to be included in gross income under Section 951(a)(1) provided it is so reported. The same increase to stock basis also applies for GILTI income inclusions.

Section 250: Deduction for GILTI and Foreign-derived Intangible Income ("FDII"). The TCJA 2017 added Section 250 to the Code, which allows a domestic corporation a deduction equal to 37.5% of its foreign -derived intangible income (“FDII ”) and 50% of its GILTI inclusion. Foreign -derived intangible income (“FDII ”) is income derived from exported U.S. generated goods and services that are attributable from intangible business assets. There are three components of the FDII computation: (1) domestic content and production; (2) foreign use; and (3) return on intangibles. There are detailed applicable rules and definitions to these TCJA 2017 provisions. Also note the continued "life" of the IC-DISC as well see Sections 991 et seq. which can produce tax savings on commission income receipts of approximately 14 percentage points (23.8% versus 37% at maximum individual shareholder rates). IC-DISC income falls outside the scope of Section 250.

Where the applicable foreign tax rate on GILTI is 0%, the U.S. residual corporate tax rate on FDII is 13.125% (62.5% of 21%) and 10.5% on GILTI (50% of 21%) with respect to applicable foreign source income. Where the Section 250 deduction, in the aggregate, exceeds taxable income, there is a proportionate amount of the allowable deduction under Section 250. The Section 250 deduction cannot contribute to a net operating loss.

TCJA 2017 did not sunset Section 250 but had provided for tax years beginning after 2025, the percentage of the deductible amount is reduced to 21.875% for FDII and 37.5% for GILTI. Accordingly, the effective tax rate for GILTI would have increased to 13.125% and with respect to FDII increases to 16.406% for tax years beginning in 2026.

The OBBB retains Section 951A for GILTI. New Section 951B extends the application of the CFC inclusion rules under Section 951 and Section 951A to “foreign controlled U.S. shareholders” of “foreign controlled foreign corporations”. This is in response to Congress' repeal of the previously repealed downward attribution of stock ownership rule in TCJA 2017. See Section 958(b)(4). The OBBB brings back Section 958(b)(4) which, in general, prohibits downward attribution from a foreign person in determining U.S. shareholder and CFC status, but again subject to new Section 951B. This appears to be a more targeted solution than repeal of Section 958(b)(4). It applies where a U.S. person or persons has control (50% or more by vote or value) of a foreign corporation which is a parent corporation of a foreign subsidiary. Section 951B adds yet another income inclusion rule into the mix for PTEP purposes.

It should also be noted that the OBBB increased the deemed paid foreign tax credits under Section 960 from 80% to 90%. While the prior administration had proposed the repeal of the FDII deduction, it remains intact. While Section 250 does not sunset, for tax years beginning after 2025, the percentage of the deductible amount is reduced to 21.875% for FDII and 37.5% for GILTI. The FDII deduction "haircut" or limitation is reduction is set at 33.34% (not 37.5% since Congress had previously scheduled a reduction of the rate to 21.875% for post-2025 years). The 10% QBAI computation is eliminated. For lexicon purposes, GILTI is renamed “net CFC tested income” and FDII is renamed “foreign-derived deduction eligible income”. Note also that a further important modification of the FDII rule is a new exclusion for any income and gain from the sale or other disposition of any intangible property and any other property subject to amortization or similar cost recovery allowance. See also Section 367(d). Therefore, income from intangibles defined in Section 367(d)(4) will not be eligible for FDII benefits.

New Section 4475: Excise Tax on Certain Remittances. The OBBB, in new Section 4475, imposes a 1% remittance tax on any electronic transfer of funds requested by a sender located in the United States (including US territories and possessions) to a recipient located outside the United States and initiated by a remittance transfer provider (defined by reference to the Electronic Fund Transfer Act). A remittance transfer includes transfers by credit card or debit card. Anti-conduit rules under Section 7701(l) are included to subject multiple party financing arrangements to the 1% remittance tax. The 1% excise tax would be payable by the sender of the remittance transfer and collected and remitted to the IRS by the remittance transfer provider on a quarterly basis. The remittance transfer provider owes the tax if the tax is not collected from the sender. Much guidance is expected to be issued in this area and there will definitely be many U.S. persons who will be surprised about this new excise tax provision.

Proposed Section 899: Shelved by Congress At Least for Now. The House version of the OBBB had proposed that Treasury had the power to designate any jurisdiction that was imposing discriminatory taxes on U.S. companies would be surcharged up to 20% points on U.S. withholding rates, an additional 5% points per year, regardless of applicable tax treaty limitations. Thus, if a foreign country imposed a "profits top-up" or undertaxed profits tax or a digital sales or services tax, there could be a Section 899 withholding tax surcharge. This became a "hot potato" thrown into the tariff issues and was ultimately resolved by Treasury Secretary Bessent in reaching a deal on Pillar two type issues with G7 leaders and representatives and therefore proposed Section 899 was shelved. Still House Ways & Means Committee Chair Smith (R-Missouri) has expressed that Section 899 could be revived and re-introduced by Congress.

Trump II Administration's Expected Rejection of OECD's Two-Pillar Global Tax Reform Plan. For the Pillar Two fans out there, many would argue that with a worldwide 15% tax on large multi-national business enterprises, there is no need for both subpart F and GILTI. In fact, this argument is incorrect and provides too much benefit for U.S. corporations. There is rate reduction through Section 250 and the rules under Subpart F are too complex. Supporters of this “reformist” movement that were very much involved in making recommendations to the Biden Administration on tax reforms are still vocal in their opposition to lower taxes in general and reject limiting tax incentives for U.S. companies to “onshore” business operations. The heart of Pillar 2 is the global anti-base-erosion (GLOBE) rules which consist of an income inclusion rule and a backup provision, the undertaxed profits rule (“UTPR”). Jurisdictions may adopt qualified domestic minimum top-up taxes that conform with the GLOBE rules. These rules were in response to the TCJA 2017's GILTI and BEAT provisions. Both would have to be revised to conform with the GLOBE rules. See OECD, “Technical Guidance on the Pillar Two Model Rules for 15% Global Minimum Tax” (Mar. 13, 2022), https://web-archive.oecd.org/2022-03-14/626879-oecd-releases-detailed-technical-guidance-on-the-pillar-two-model-rules-for-15-percent-global-minimum-tax.htm. Stay tuned.

This post is provided by August Tax Law, P.C. for educational and informational purposes only and the reader may not rely on the information provided herein or otherwise consider the information as "legal advice". The reader is encouraged to address any and all issues of interest in this post to his or her tax advisor or tax counsel.

AUGUST TAX LAW, P.C.