Unpacking the big beautiful international tax provisions of the One Big Beautiful Bill

On May 12, 2025, the House Committee on Ways and Means (WMC) released a draft of the tax provisions of the highly anticipated budget reconciliation bill, referred to as the “One Big Beautiful Bill” Act (OBBB), and on May 14, 2025, the WMC voted along party lines to approve those provisions.¹ Although the majority of the tax portion of the OBBB is focused on the Administration’s domestic agenda, including most notably, the extension of the individual income tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), the OBBB includes some material changes to the international tax rules, as well as a change to the Tariff Act of 1930 (Tariff Act), including:

• Imposing additional US tax on income earned by non-US persons in jurisdictions that impose discriminatory or extraterritorial taxes, including specifically digital services taxes (DSTs) and the undertaxed profits rule (UTPR) that is included in the Global Anti-Base Erosion (GloBE) rules promulgated by the Organization for Co-operation and Economic Development (OECD);

• Permanently extending the current section 250 deduction rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI);²

• Permanently extending the current base erosion anti-abuse tax (BEAT) rate that is used in computing the tax due under section 59A;

• Exempting certain income earned in the US Virgin Islands (USVI) from being considered GILTI tested income;

• Allowing taxpayers to currently deduct (rather than amortize) domestic (but not foreign) research or experimental (R&E) expenditures;

• Repealing the de minimis entry privilege of the Tariff Act and expanding the civil penalties under the Tariff Act; and

• Limiting the drawback of excise taxes paid with respect to substituted merchandise.

On May 18, 2025, the House Budget Committee advanced the consolidated OBBB, along party lines, though with a handful of Republican members voting “present.” The OBBB is now with the House Rules Committee, where a modified version has been reported (which did not substantively modify the international provisions discussed herein). The goal is for the House to pass the budget reconciliation bill prior to Memorial Day and for both the House and the Senate to pass the bill in time for the President to sign it into law on July 4, 2025. The international provisions mentioned above are discussed in greater detail below.

New Section 899: Enforcement of Remedies Against Unfair Foreign Taxes

The OBBB introduces new section 899, which is intended to respond to certain unfair foreign taxes, including both discriminatory and extraterritorial taxes, imposed on US persons (or certain foreign entities owned by US persons) by a foreign government. Specifically, section 899 increases the tax and withholding rates for certain taxpayers associated with “discriminatory foreign countries” on several categories of income, including:

• Fixed, determinable, annual, or periodical (FDAP) income, certain capital gains, and certain other types of US-source income of a nonresident alien individual;

• Effectively connected income (ECI) of a nonresident alien individual (but only to the extent imposed on gains and losses from the disposition of a United States real property interest) and a foreign corporation;

• FDAP income and certain other types of US-source income of a foreign corporation;

• Dividend equivalent income of a branch (i.e., the branch profits tax); and

• US-source gross investment income of foreign private foundations.

The persons on whom such increased rates are imposed generally include governments and individual residents (other than US citizens) of, and corporations (other than US-owned foreign corporations), foundations, trusts, partnerships, or branches formed or tax resident in, a country that imposes an unfair foreign tax. In addition, non-publicly traded foreign corporations controlled by such persons are subject to the increased rates.

The increase in rates ranges from five percentage points up to 20 percentage points, increasing by five percentage point increments each year. Where a tax treaty applies, the increase is added to the maximum tax rate otherwise imposed under such treaty.

Section 899 defines an unfair foreign tax broadly to include a UTPR, DST, diverted profits tax, and, to the extent provided by Treasury, an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose that the tax be economically borne, directly or indirectly, disproportionately by US persons. Unfair foreign taxes for this purpose, however, do include any foreign tax that excludes US persons (including a trade or business thereof) and certain CFCs from its scope.

Section 899 also modifies the application of the BEAT to certain non-publicly traded corporations that are more than 50-percent owned (by vote or value) by certain persons associated with foreign countries that impose an unfair foreign tax. For such corporations, the BEAT is applied:

• Without regard to the general BEAT applicability thresholds related to annual gross receipts and the base erosion percentage;

• Using a 12.5 percent BEAT rate (as opposed to the 10 percent rate discussed below), and without the benefit of credits allowed under chapter 1 of the Code;

• Without exclusion for amounts on which tax is imposed or withheld or payments for services eligible for the services cost method under section 482; and

• Treating any capitalized amount (other than the purchase price of depreciable or amortizable property or inventory) that would have been a base erosion payment (as an amount paid or accrued to a related foreign party for which a deduction is allowable) but for such capitalization as having been deducted.

Section 899 would be effective on the date of enactment, with specific effective dates applying for certain categories of taxes and the modification of the BEAT.

Permanently Maintain the Current Section 250 Deductions for FDII and GILTI

The TCJA enacted significant changes to the international tax provisions of the Code. Among those changes was the enactment of section 951A, which sets forth the GILTI rules; the enactment of section 250, which provides for a deduction with respect to a US corporation’s FDII and a US shareholder’s pro rata share of GILTI; and the enactment of section 59A, which contains the BEAT rules.

Broadly, FDII represents a portion of a US corporation’s income derived from selling, leasing, or licensing products to non-US persons for use outside of the United States, as well as income derived from services provided to a person, or regarding property, located outside of the United States. Subject to a taxable income limitation, section 250 allows a US corporation to claim a deduction for 37.5 percent of its FDII.

The GILTI provisions generally require a US shareholder of a CFC to include in income its pro rata share of its GILTI. GILTI represents a US shareholder’s net pro rata share of certain income of the CFCs with respect to which it is a US shareholder (generally, income other than subpart F income, to the extent it exceeds 10 percent of the aggregate basis of the CFC’s tangible assets used in a trade or business). Subject to a taxable income limitation, section 250 allows a US shareholder to claim a deduction for 50 percent of its GILTI inclusions, plus the corresponding section 78 gross-up, for the taxable year.

Under current law, for taxable years beginning after December 31, 2025, the 37.5 percent deduction for FDII is reduced to 21.875 percent, and the 50 percent deduction for GILTI is reduced to 37.5 percent. The OBBB amends section 250 by making each of the 37.5 percent FDII deduction and the 50 percent GILTI deduction permanent for taxable years beginning after December 31, 2025.

Permanently Maintain the Current BEAT Rate

In general, the BEAT is a corporate minimum tax imposed on certain corporations that make certain base erosion payments to foreign related parties. The BEAT rate that is used to compute the tax due under section 59A is 10 percent for taxable years beginning after December 31, 2018, but before January 1, 2026. For taxable years beginning after December 31, 2025, the BEAT rate increases to 12.5 percent. In addition, for taxable years beginning after December 31, 2025, in applying the BEAT, corporations would not receive the benefit of any tax credits allowed under chapter 1 of the Code.

The OBBB amends section 59A by permanently reducing the BEAT rate to 10 percent for taxable years beginning after December 31, 2025. In addition, for taxable years beginning after December 31, 2025, the OBBB repeals the modification requiring corporations to reduce their regular tax liability by all credits allowed under chapter 1 of the Code (thereby preserving the current application of the BEAT rules).

Exempt Certain Income Earned in the USVI from Being Treated as GILTI Tested Income

The OBBB amends section 951A to exclude from GILTI tested income certain services income derived from labor or personal services performed in the USVI by individuals on behalf of a USVI corporation, and the income must also be effectively connected with the conduct of a trade or business within the USVI. This exemption only applies to a US shareholder that is (1) an individual, trust, or estate, or (2) a closely held C corporation if such corporation acquired its direct or indirect equity interest in the USVI corporation before December 31, 2023.

This exemption would be effective for taxable years of foreign corporations beginning after the date of enactment of the OBBB, and to taxable years of US shareholders in which or with which such taxable years of foreign corporations end.

Maintain 15-Year Amortization for Foreign R&E Expenditures

In general, section 174 requires taxpayers to capitalize and amortize specified R&E expenditures (i.e., domestic R&E) ratably over a five-year period, or, in the case of expenditures attributable to R&E that is conducted outside of the United States (i.e., foreign R&E), over a 15-year period, beginning with the midpoint of the taxable year in which those costs are paid or incurred.

The OBBB would suspend the application of section 174 to domestic R&E expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Section 174, however, would continue to apply to foreign R&E expenditures requiring taxpayers to amortize them over 15 years beginning with the midpoint of the taxable year in which they pay or incur the expenditures. For an in-depth discussion of the expensing of R&E expenditures, see Eversheds Sutherland legal alert: Consensus in a cloud of chaos: House confirms favorable modifications to three key business tax provisions.

Repeal the De Minimis Entry Privilege of the Tariff Act and Expands Civil Penalty

Under current law, section 321 of the Tariff Act generally permits commercial shipments valued under $800 that are bound for United States businesses and consumers to enter into the United States free of duties and taxes.

The OBBB repeals the $800 de minimis rule. In addition, the OBBB expands the civil penalty under section 321 of the Tariff Act. Under this expanded penalty, a civil penalty of up to $5,000 (for the first violation) and up to $10,000 for each subsequent violation, would be imposed on any person who enters, introduces, facilitates, or attempts to introduce an article into the United States using the privilege of section 321 of the Tariff Act that violates United States law.

Limits Drawbacks of Taxes Paid with Respect to Substituted Merchandise

Under current law, certain importers may be eligible for a “drawback” of excise tax on certain products, including tobacco products and related products. In general, a drawback is the refund of certain duties, taxes, and fees paid on import if the product is exported or destroyed. A “substitution drawback” involves the refund of certain duties, taxes, and fees paid on import when similar goods are exported.

For purposes of the drawback of excise tax imposed on tobacco products and related products, the OBBB limits the amount of drawback granted under the Code or the Tariff Act on the export or destruction of substituted merchandise to the amount of taxes paid (and not returned by refund, credit, or drawback) on the substituted merchandise.

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1 On May 9, 2025, the WMC released an initial 28-page draft of the tax portion of the OBBB. On May 12, 2025, the WMC also released a section-by-section explanation of the provisions. Also on May 12, 2025, the Joint Committee on Taxation released a description of the tax provisions of the OBBB.

2 Unless otherwise noted, all “section” references are to the Internal Revenue Code of 1986, as amended (Code).