At a Glance
The One Big Beautiful Bill Act fundamentally restructures how foreign income, credits, and export incentives interact. While headlines focus on rate changes, the structural modifications underneath will determine your international operations’ impact on overall tax efficiency in a changing global landscape.
• A Race Against Time: With less than six months until January 1, 2026, companies need to model, restructure, and optimize before the new international tax regime takes effect.
• Three Structural Shifts: (1) QBAI elimination exposes all foreign income to tax while expanding benefits for domestic exporters; (2) Enhanced foreign tax credits remain “use-it-or-lose-it” annually; (3) Intellectual property dispositions face different treatment than ongoing licensing arrangements.
• Focus on U.S. Tax Optimization: The 14-16% optimal foreign tax rate band for U.S. purposes drives planning decisions, with structural changes offering significant opportunities for tax efficiency improvements.
For multinational businesses navigating global expansion, the OBBBA introduces changes that go beyond typical rate adjustments. It rewrites fundamental assumptions about where to locate operations, how to structure intellectual property, and when to recognize cross-border income.
The Act even renames key international provisions to reflect their evolved nature: Global Intangible Low-Taxed Income (GILTI) becomes “Net CFC Tested Income” (NCTI), while Foreign-Derived Intangible Income (FDII) transforms into “Foreign-Derived Deduction Eligible Income” (FDDEI). These aren’t just cosmetic changes. They signal fundamental shifts in how these regimes operate.
While most CFOs focus on the publicized rate changes, the elimination of expense allocations will have far greater impact on your effective tax rate and cash flow. Companies that model these interactions before January 1, 2026, can transform potential tax increases into strategic advantages.
To clarify the rate transitions and new terminology, here’s how the key provisions change:
| Provision | Current (2025) | New (2026) | What It Means |
| GILTI → Net CFC Tested Income (NCTI) | 10.5% effective rate (50% deduction) | 12.6% effective rate (40% deduction) | Higher base rate but better credit utilization |
| FTC Haircut on NCTI | 20% (80% creditable) | 10% (90% creditable) | More foreign taxes count toward U.S. credit |
| FDII → FDDEI | 13.125% effective rate (37.5% deduction) | 14% effective rate (33.34% deduction) | Slightly higher rate but broader application |
| QBAI Benefit | 10% exclusion applies | Eliminated | All CFC income taxed; all export income benefits |
| Expense Allocation | Interest & R&D reduce FTC capacity | Not allocated to NCTI | Dramatically improves credit utilization |
The renaming reflects substantive changes: NCTI no longer targets just “intangible” income since QBAI elimination means all CFC income is captured. Similarly, FDDEI’s broader base justifies dropping the “intangible” focus.
Note: CFC (Controlled Foreign Corporation) income includes both NCTI and Subpart F income. While NCTI typically represents the larger portion for most companies, Subpart F income from passive sources or related-party transactions remains subject to immediate U.S. taxation at regular rates.
The One Big Beautiful Bill doesn’t just tweak international tax—it rewires it. While headlines focus on the revival of immediate R&D expensing and lower GILTI rates, the real long-term impact lies in the structural shifts that change how, when, and where income is taxed. These aren’t just rate changes—they’re foundational changes to the mechanics that determine your effective tax rate. From the elimination of QBAI to new limits on intangible gains and foreign tax credit usage, companies operating internationally face a new set of tradeoffs that demand proactive modeling and restructuring.
The elimination of Qualified Business Asset Investment (QBAI) from both NCTI and FDDEI calculations fundamentally changes the economics of physical operations. Under current rules, companies with significant tangible assets abroad benefit from a 10% deemed return exclusion that shields income from U.S. tax. Similarly, domestic manufacturers see their export incentive benefits reduced by a comparable offset. Starting in 2026, these cushions disappear entirely.
For foreign operations, this means every dollar of CFC profit faces the 12.6% NCTI tax before foreign tax credits. This includes manufacturing in Mexico, software development in India, or distribution in Europe. Companies that strategically located tangible assets offshore to maximize QBAI benefits now need to reconsider whether those structures still make economic sense without the tax shield.
Conversely, domestic exporters emerge with expanded benefits. A U.S. manufacturer with $500 million in production assets previously saw most export profits taxed at 21% because the QBAI offset consumed the benefit. Post-2026, their entire export profit margin qualifies for the 14% FDDEI rate. On typical manufacturing margins, this change alone could improve annual cash flow by millions.
The OBBBA transforms foreign tax credit economics for NCTI through interconnected changes that dramatically improve credit utilization, but with a critical catch. The reduction of the FTC haircut from 20% to 10% means 90% of foreign taxes become creditable, up from 80%. More significantly, the elimination of interest and R&D expense allocation to the NCTI basket removes a major impediment to credit usage.
Consider how this plays out in practice. A technology company with $100 million in R&D spending and significant foreign operations previously saw millions in foreign tax credits expire unused because expense allocations reduced the FTC limitation. Under the new rules, R&D expenses no longer reduce the NCTI foreign tax credit capacity. The same applies to highly leveraged companies where interest expense previously consumed FTC availability.
However, the fundamental limitation remains unchanged: NCTI foreign tax credits expire annually if unused. Unlike general FTC baskets that allow 10-year carryforwards, excess NCTI credits evaporate each December 31. This creates an optimal foreign tax rate band of approximately 14-16%, assuming no other limitations apply. At 14%, the math works perfectly. The foreign tax rate of 14% multiplied by 90% creditability equals the 12.6% U.S. tax. Go much higher, and credits expire annually with no ability to recoup them in future years.
It’s worth noting that the Section 250 deduction and any directly allocable expenses still factor into the FTC limitation calculation for NCTI. Companies should model carefully to understand their actual credit capacity, not just the headline 90% creditability rate. State taxes may also affect the overall calculus for companies with significant domestic operations.
With the OBBBA’s enactment on July 4, 2025, the landscape for intellectual property transactions shifted dramatically. Gains from disposing of intangible property no longer qualify for FDDEI treatment, facing taxation at the full 21% corporate rate rather than the preferential 14% rate. This encompasses a broad range of intangibles defined in Section 367(d)(4), from patents and trademarks to customer relationships and goodwill.
Yet this change doesn’t close all doors; it redirects traffic. Ongoing royalty income from licensing arrangements continues to qualify for FDDEI treatment at 14%. Service fees for technical assistance, software-as-a-service revenues, and other recurring income streams maintain their favored status. The tax code now creates different incentives for different IP strategies, requiring careful evaluation of the optimal approach for each company’s specific circumstances.
For manufacturers, tech companies, and global distributors, the OBBBA introduces fundamental shifts in how cross-border income is taxed. Changes to QBAI, foreign tax credits, and IP treatment upend long-standing planning strategies and require a fresh look at global structures. The impact on effective tax rates will be both material and uneven—depending entirely on where and how you operate.
Technology companies face perhaps the most nuanced planning environment under the new rules. Changes to IP taxation and foreign tax credit mechanics require careful optimization, while the elimination of expense allocations provides significant relief.
Case In Point
Consider TechCo, spending $100 million annually on R&D with $200 million in profits from Irish subsidiaries currently taxed at 12.5%. Under 2025 rules, income of approximately $180 million after QBAI faces a 10.5% rate. R&D and interest expense allocations limit FTC utilization, resulting in an effective residual U.S. tax of 6-8%.
Come 2026, the picture changes dramatically. While the full $200 million of foreign income now faces the 12.6% NCTI rate without QBAI protection, the credit calculation improves substantially. The elimination of R&D expense allocation to the NCTI basket means the company’s R&D spending no longer reduces foreign tax credit capacity. With Ireland’s 12.5% rate generating 11.25% in creditable taxes after the 90% haircut, the residual U.S. tax drops to just 1.35% despite the higher headline rate.
Manufacturing represents perhaps the clearest beneficiary of the OBBBA changes, particularly for companies with significant domestic production and international sales. The elimination of QBAI from the FDDEI calculation removes a major limitation that previously neutralized export benefits for asset-intensive businesses.
A typical manufacturer with $500 million in U.S. production assets and $150 million in annual export sales illustrates the transformation. Under current rules, the QBAI offset of $50 million often exceeded profit margins, eliminating most benefits. The company’s export profits faced essentially the full 21% rate despite qualifying for the export incentive in theory.
Post-2026, the entire profit margin on exports qualifies for the 14% FDDEI rate. At a 30% EBITDA margin, this translates to $45 million in qualifying income. This represents an annual tax reduction of approximately $3.15 million, directly improving cash flow and competitiveness. Additionally, the new 50% foreign sourcing rule for inventory sold through foreign offices that materially participate in sales can unlock additional foreign tax credits previously unavailable due to sourcing limitations.
The availability of 100% bonus depreciation amplifies these benefits, making domestic manufacturing expansion particularly attractive from a tax perspective. Companies should evaluate their global supply chains holistically, considering how the combination of FDDEI benefits, immediate expensing, and enhanced FTC utilization might justify reshoring certain operations or expanding domestic capacity.
Private equity-backed companies with significant leverage see dramatic improvements in their international tax position under the OBBBA. The elimination of expense allocation rules fundamentally changes how interest expense interacts with foreign tax credits, often converting situations of double taxation into full credit utilization.
Consider a portfolio company with $2 billion in acquisition debt generating $160 million in annual interest expense and $300 million in EBITDA from European operations taxed at 20%. Under current rules, interest expense allocation reduces FTC capacity, effectively stranding foreign tax credits and creating U.S. tax on income already taxed at high rates abroad. The combined effective rate often approaches 25-30%, despite paying 20% foreign tax.
Starting in 2026, none of that interest expense reduces the NCTI foreign tax credit limitation. At a foreign tax rate of 20%, companies can now fully eliminate their 12.6% U.S. NCTI tax, given the increased 90% creditability. However, this also means 5.4% of foreign taxes expire annually with no carryforward possibility.
For companies consistently facing tax rates above 20%, the high-tax election provides relief by excluding that income entirely from the NCTI regime. This election, made annually on a country-by-country basis, excludes income taxed at 90% of the U.S. rate (18.9%) or higher.
The complexity of the OBBBA changes requires thoughtful planning across multiple dimensions. Companies should focus on understanding how the new rules affect their unique circumstances. This allows development of flexible strategies that can adapt as the international tax landscape continues to evolve.
The 14-16% band minimizes U.S. tax without wasting significant credits. Achieving optimal rates may require:
Given the use-it-or-lose-it nature of NCTI credits, implement quarterly monitoring of effective rates by jurisdiction. Model significant transactions’ impact on credit utilization to avoid year-end surprises.
As discussed earlier, the new divide between disposition and licensing treatment requires balancing tax differentials against business considerations including substance requirements, transfer pricing flexibility, and operational needs.
• Model your effective tax rates by jurisdiction under both 2025 and 2026 rules
• Review IP ownership structures given the new disposition tax treatment
• Assess domestic manufacturing operations for expanded FDDEI benefits
• Evaluate debt allocation between U.S. and foreign entities
Rather than viewing these changes as purely compliance challenges, forward-thinking companies should identify strategic opportunities. The enhanced FTC utilization may justify new market entries previously unattractive due to double taxation. The expanded FDDEI benefits might support reshoring decisions or domestic capacity expansion. The clearer delineation between IP sale and licensing treatment could inform technology commercialization strategies.
The OBBBA’s international provisions create both challenges and opportunities that vary significantly by company profile and industry. Success requires understanding not just what changed, but how those changes interact with your specific structure, operations, and strategic objectives.
Companies should prioritize comprehensive modeling that compares outcomes under 2025 and 2026 rules across different scenarios. This analysis should extend beyond simple rate calculations to include the impact of expense allocations, credit utilization, and potential structural optimizations. Only through detailed modeling can companies identify which planning strategies create real value versus those that merely shift problems from one area to another.
The compressed timeline for implementation adds urgency to these decisions. Most structural planning should be completed before January 1, 2026. This includes entity restructurings, check-the-box elections, transfer pricing adjustments, and debt reallocation strategies. Waiting until late 2025 may foreclose certain options or result in rushed execution that fails to achieve optimal outcomes.
The complexity of these interrelated changes makes professional guidance particularly valuable. The difference between thoughtful planning and reactive compliance could represent millions in annual tax efficiency. Companies that approach these changes strategically, with expert modeling and implementation support, position themselves to thrive in the new international tax landscape.
The international tax landscape is shifting dramatically on multiple fronts. Whether you need to model specific scenarios, evaluate structural alternatives, or develop a comprehensive transition plan, understanding these complex dynamics is critical to achieving optimal outcomes.
Sapowith Tax Advisory specializes in helping multinational businesses navigate complex international tax transitions. Our team combines deep technical expertise with practical business insights to develop strategies that work for your specific situation.
Contact us to discuss how these changes affect your specific situation and explore strategies tailored to your business objectives.
This article is for general information only; it is not tax, legal, or accounting advice. Reading it does not create a client relationship with Sapowith Tax Advisory. Consult your own qualified advisers before acting on any information contained here. Sapowith Tax Advisory disclaims all liability for actions taken, or not taken, based on this content.