*Originally published in Vol. 27 No. 21 of the Lawyers Journal, the Flagship Publication of the Allegheny County Bar Association. View here.
The enactment of the One Big Beautiful Bill Act (“OB3” or “the Act”) introduced significant changes to the U.S. tax landscape for multinational corporations by extending key provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”) and introducing new measures designed to achieve certain policy objectives of the Trump administration. This article will address certain key international tax provisions of OB3.
Research and Experimental Expenditures
OB3 restored immediate deductibility of domestic research and experimental (“R&E”) expenditures paid or incurred in tax years beginning after December 31, 2024, reversing the rule requiring those costs to be capitalized and amortized over five years. Taxpayers now have the option to either immediately deduct R&E expenditures or capitalize and amortize these costs over a five-year period. However, foreign R&E expenditures must still be capitalized and amortized over 15 years and Internal Revenue Code Section (“§”)174(d) prevents taxpayers from accelerating the deduction for foreign R&E costs even if the items are disposed, retired, or abandoned. Finally, the Act reinstated the coordination provision of §280C, requiring deductions to be reduced by the amount of research credits claimed.
The changes to the treatment of R&E expenditures in OB3 have practical impacts for corporate taxpayers. Domestic research investments will provide faster tax benefits while overseas spending is effectively penalized through deferred deductions. Businesses should consider these tax consequences and operational effects when making decisions about where to perform R&E activities.
Interest Expense Deduction
OB3 modified §163(j) which generally limits the deductibility of business interest expense to the sum of 30 percent of adjusted taxable income (“ATI”) and business interest income. Effective for tax years beginning after December 31, 2024, the Act closely aligns ATI to earnings before interest, taxes, depreciation, and amortization (“EBITDA”), widening the base for interest deductibility compared to previous rules which disallowed depreciation and amortization from being added back in the ATI formula. This change will benefit capital-intensive corporations as well as businesses, which have significant amounts of tax-deductible intangible assets.
A less favorable provision in the OB3 requires ATI to be computed without certain foreign inclusions such as Subpart F income, net CFC tested income, §956 inclusions or §78 gross-ups. Further, taxpayers are now required to apply the §163(j) limitation before capitalizing interest in other code provisions. Companies with high levels of debt should reassess their after-tax cost of debt to consider these recent changes.
Net CFC Tested Income and Foreign Tax Credits
Another key international provision of the OB3 was the re-branding of the term Global Intangible Low-Taxed Income, which will now be referred to as “Net CFC Tested Income” (“NCTI”). Additionally, the §250 deduction will be reduced from 50 percent to 40 percent for tax years beginning after December 31, 2025, thereby increasing the effective U.S. tax rate on CFC income. The Act also eliminated the “deemed tangible return” offset which had previously reduced tested income by qualified business asset investments (“QBAI”), perhaps to prevent U.S. corporations from making capital investments overseas as a planning strategy. These provisions generally broaden the U.S. tax base and were introduced to offset more favorable tax provisions contained elsewhere in The Act.
The foreign tax credit regime was impacted by OB3 in a few different ways, including the introduction of a new sourcing rule for inventory sales. For goods produced in the U.S. and sold abroad, up to 50 percent of the income may now be treated as foreign-source for foreign tax credit purposes. This characterization will benefit exporters as it provides them with a greater ability to absorb foreign tax credits. Other favorable changes to the foreign tax credit calculation include a new rule that removes the requirement to allocate interest and R&E expenditures to the §951A basket, which will result in higher levels of foreign-source income for certain taxpayers, and the increase in deemed paid credit for NCTI from 80 percent to 90 percent.
FDDEI Regime
OB3 renamed Foreign-Derived Intangible Income (“FDII”) to Foreign- Derived Deduction Eligible Income (“FDDEI”) and reduced the §250 deduction from 37.5 percent to 33.34 percent, increasing the effective rate of tax on qualifying income to around 14 percent from about 13.1 percent. Similar to the changes to NCTI, the return on QBAI was eliminated. Unlike the past temporary FDII regime, FDDEI is permanent. The permanency of the FDDEI regime is a welcome development for corporations with intellectual property based in the U.S. since it provides certainty in long-term planning, allowing corporations to coordinate financing, research, and intangible asset strategies with anticipated U.S. tax outcomes.
Conclusion
The new legislation enacted with OB3 marks a significant shift in both domestic and international tax policy. For multinational corporations, the changes affect many aspects of planning, including R&E investment, interest deductibility, foreign income inclusions, and credit utilization. The Act provides stability by making several provisions permanent, but it also narrows certain benefits, which will require companies to rethink structures, cash tax positions, and long-term plans. A proactive analysis by companies will be essential to capture opportunities and mitigate risks under the new legislation.
