The One Big Beautiful Bill Act (OBBBA) includes significant provisions regarding taxation and, in particular, international taxation. After an analysis of the OBBBA, the following emerge as the five noteworthy provisions affecting international tax matters:
- Welcome back credits. A U.S. taxpayer only receives a foreign tax credit to the extent of U.S. tax on foreign-source income. Since 2018, all exports by U.S. manufacturers constituted U.S.-source income, meaning that they did not receive a credit for any foreign taxes paid on the export sale. The OBBBA benefits U.S. manufacturers who export by characterizing half their export income as foreign-source income if they have an office in a foreign country that materially participates in the sale.
- No longer GILTI. Previously, a U.S. owner of a foreign subsidiary did not pay U.S. tax on the foreign subsidiary's income unless the income exceeded 10 percent of the foreign subsidiary's depreciable assets. This was known as Global Intangible Low-Taxed Income (GILTI). The OBBBA eliminates the 10 percent of the foreign subsidiary's depreciable assets. Now, almost ALL of the foreign subsidiary's income, known as Net CFC Tested Income, will hit the return of the U.S. owner. Fortunately, tax planning techniques exist to reduce this tax impact on U.S. owners.
- Export report. The deduction for foreign-derived income has been enhanced. The OBBBA reduces the previous deduction of 37.5 percent of foreign-derived income to 33.34 percent, but has increased foreign-derived income by eliminating the requirement that it must exceed 10 percent of depreciable assets (similar to the former GILTI). Now, the deduction applies to all foreign-derived deduction-eligible income, which will generally result in a larger deduction.
- DA... EBIT. As before the OBBBA, a business can only deduct an interest expense to the extent of interest income plus 30 percent of adjusted taxable income. However, the OBBBA changes the definition of adjusted taxable income, thereby increasing both it and the deduction for interest expense. Previously adjusted taxable income was similar to the calculation of EBIT, but now it is similar to the calculation of EBITDA.
- We've got the BEAT! The Base Erosion Anti-Abuse Tax (BEAT), which applies only to large foreign-owned U.S. companies, has increased from 10 percent to 10.5 percent.
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