USA Trends and Developments Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
The OBBA also adds a new Section 951B which cap - tures and imposes the CFC rules on certain foreign- controlled US shareholders and certain related foreign corporations (referred to as foreign-controlled foreign corporations or F-CFCs) that is intended to prevent the transactions that the original repeal of Section 958 (b)(4) was attempting to address. CFC Look-through Rule In welcome removal of uncertainty, the OBBA makes permanent a rule (in Section 954 (c)(6)) that exempts payments of dividends, interest, rents, and royalties between CFCs from immediate taxation under the Subpart F regime. Global Intangible Low-Tax Income (GILTI) changed to Net CFC Tested Income (NCTI) Introduced in the TCJA, GILTI is a US tax regime that was designed to discourage US multinationals from shifting profits to low or no-tax jurisdictions. While maintaining the principal framework of this regime, the OBBA makes some significant changes. More specifically, the OBBA: • renames the regime to NCTI and reduces it to a permanent 40% deduction (down from the prior 50% rate) thus yielding a 12.6% effective tax rate (before taking into account foreign tax credits (FTCs) and limitations on FTCs); • increases allowable indirect FTCs to 90% (up from 80%); • limits the expenses allocable to the NCTI calcula - tion (eg, no longer apportioning interest expense and certain research and experimental costs) generally resulting in more FTCs being usable to reduce NCTI liability; • removes an exclusion from the GILTI calculation for a deemed return on a CFC’s tangible assets – resulting in an increase of taxable NCTI for taxpay - ers that own CFCs with material fixed assets; and • applies to tax years beginning in 2026. FDII changed to FDDEI The foreign-derived intangible income (FDII) deduc - tion was a TCJA tax incentive designed to encourage US multinationals to produce foreign income from the sale of goods or services tied to US intangibles. The OBBA:
• renames this deduction foreign-derived deduction- eligible income (FDDEI) and reduces the deduction from 37.5% to 33.34% (although the deduction was set to be reduced further under the TCJA for tax years beginning after 31 December 2025); • eliminates a reduction of deduction-eligible income for a deemed return on tangible assets – resulting in an increase in the income eligible to be reduced by the deduction; and • limits the expenses allocable to the FDDEI calcula - tion (eg, no longer apportioning interest expense and certain research and experimental costs) – resulting in an increase in the amount of income eligible for reduction by the deduction. Base Erosion Anti-Abuse Tax (BEAT) rate is increased to 10.5% The BEAT is a provision from the TCJA that imposes an additional tax to the extent an applicable taxpayer’s modified taxable income (MTI) exceeds 10% of its regular tax liability (reduced by certain tax credits). The 10% threshold by which a taxpayer’s MTI is measured was set to increase to 12.5% beginning in 2026. The OBBA sets the BEAT rate permanently to 10.5% – a net positive for BEAT taxpayers who avoid the 12.5% scheduled increase. The Revenge Tax – Proposed (and Withdrawn) Section 899 Early drafts of the OBBA included a provision (referred to as “Section 899”) that required an increase in tax rates, removal of certain tax exemptions, and other retaliatory measures on countries (and such countries’ residents) that have “extraterritorial” or “discrimina - tory” taxes. Section 899 was understood to target tax - es such as Pillar Two’s undertaxed profits rule, digital services taxes (DSTs), or diverted profits taxes. Sec - tion 899 would have increased tax rates incrementally by five percentage points in each taxable year until reaching a cap of 15 or 20 percentage points. This retaliatory provision was not included in the final OBBA in response to the deal with the G7 countries to exempt US companies from key aspects of Pillar Two (eg, the undertaxed profits rules and the income inclusion rule). Furthermore, the OECD recently issued a “Side-by-Side Package” following the USA’s agree - ment with the G7 countries. This package includes
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