Tax News & Views International Weekly: The Tax Bill's Global Tax Review

The legislation known as the One Big Beautiful Bill Act, passed last week and signed into law by President Trump on July 4th, includes some subtle but significant changes to the tax code regarding multinational entities.

It could take years before we have a sense of the effects of these changes. To some degree, the changes could be viewed as housekeeping. Lawmakers smoothed out some of the kinks in the international tax regime left by the 2017 Tax Cuts and Jobs Act. But the bill also subtly shifted the system’s goals in ways that could have lasting ramifications.

One of the biggest changes the bill made in the international sphere was to repeal “qualified business asset investment” (QBAI). This was part of the calculation in how the tax on global intangible low-taxed income (GILTI) and the deduction for foreign-derived intangible income (FDII) was determined. Both, in theory, applied to intangible income, but used a formula based on unusually high profit returns on tangible assets. The logic behind this was that the more real, physical assets a company had in a jurisdiction, the more likely that profit was truly generated there. Profits that seemed out of proportion to the local physical presence implied that they had possibly been shifted from a different jurisdiction.

This same basic idea was adopted by other countries at the Organization for Economic Cooperation and Development for its 15% global minimum tax. Not only does the OECD system grant an exemption for tangible properties, it uses those as factors to apportion income when more than one country can tax it under the new OECD rules.

It’s a rough measure, but it has a lot of appeal for tax authorities. In the digital economy, tracking down the exact drivers of value and profit can be close to impossible given the complexity of a modern company. Physical structures like plants or distribution centers are harder to move than intellectual property that only exists on paper.

Harder to move, but not impossible. Systems like QBAI were also criticized for encouraging companies to move real factories or jobs to low-tax jurisdictions.

One of the over-arching goals of the TCJA was to shift the U.S. into a territorial system, which focuses on taxing domestic income while leaving foreign income for other countries. This brought the U.S. system closer to the rest of the world, making American companies more competitive, TCJA’s supporters claimed. It only did so partway—U.S. companies still pay a lot of tax on foreign income—but by granting an exemption for most foreign income and a lower rate for overseas passive income, the 2017 law took a big step in the direction toward territoriality.

The OBBBA takes a step back, and towards a worldwide system, however. It broadens GILTI to include all offshore income, while also renaming it net CFC-tested income (NCTI). It bases international taxation less on where income is generated, and more on who generates it, and whether the taxpayer is American or foreign.

That could put pressure on companies to repatriate out of the U.S., although that may seem far-fetched at the moment. But the global system is always evolving, and dynamics can change in unpredictable ways.

Noteworthy Items This Week

A Quick Look at the New Streamlined FDII Deduction – Martin Sullivan, Tax Notes ($):

There are two changes to the treatment of intangible income. The first change — which is taxpayer favorable — eliminates the calculation that attempts to tie benefits to intangible income by subtracting a measure of tangible income from total eligible income. The second change — which is taxpayer unfavorable — denies FDDEI benefits for the export of intangible property.

G7 Deal's Details To Dictate How US Cos. Fare Under Pillar 2 – Dylan Moroses, Law360 Tax Authority ($):

Prior to the expected passage of the One Big Beautiful Bill, the U.S. secured an agreement with the Group of Seven countries to exempt U.S. multinational corporations from the minimum tax system. But it isn't yet clear how the side-by-side agreement the Trump administration is advocating will cover complex corporate structures.

The Pillar Two regime imposes cross-border top-up taxes designed to ensure multinational corporations with revenue above €750 million ($881 million) pay effective tax rates of at least 15% wherever they operate. The Organization for Economic Cooperation and Development will be tasked with crafting new administrative guidance that explains how Pillar Two jurisdictions should view U.S. multinational corporations in light of the side-by-side agreement.

Trump Reveals New Batch of Tariffs From Iraq to Philippines – Hadriana Lowenkron, Bloomberg Tax ($):

Trump said he would levy a 30% rate on Algeria, Libya, Iraq and Sri Lanka, with 25% duties on products from Brunei and Moldova and a 20% rate on goods from the Philippines. The levies were largely in line with rates Trump had initially announced in April, though Iraq’s duties are down from 39% and Sri Lanka’s reduced from 44%.

Trump began notifying trading partners of new rates on Monday ahead of a deadline this week for countries to wrap up negotiations with his administration — and posted to social media that he planned to release “a minimum of 7” letters on Wednesday morning, with additional rates to be posted in the afternoon.

DSTs Are Double-Edged Swords in Growing Latin American Economies – Rafael Benevides, Bloomberg Tax:

Countries around the world are grappling with how to tax multinational enterprises that generate profit within their borders without a traditional physical presence. The slow progress of the OECD’s Pillar One proposal to reallocate some of that profit has led to unilateral digital service taxes.

For Latin American governments, DSTs represent both an opportunity to capture revenue from global tech players and a convenient justification to expand an already complex tax landscape.

Tax Still Used to Undermine Rule of Law, EU Commission Says – Somesh Rha, Bloomberg Tax ($):

Since the rule of law report now contains a single market component, its chapter on Hungary also mentions “the continued existence of visible patterns in legislation that cumulatively and significantly damage the financial base for certain foreign investors, including from other EU Member States, leading to de-investment.” This is done through tailor-made taxes, the commission underlined. In June the commission escalated its infringement proceeding against Hungary for its retail tax targeting foreign-controlled retail companies. While the commission believes this tax is a breach of the freedom of establishment, stakeholders have pointed out that it hampers the rule of law.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: The American Eagle

Debut Year:1942

Debut Publication: America's Best Comics #2

Origin Story: A lab assistant imbued with the strength and lightness of an eagle due to a lab accident, he uses his new skills to fight Nazis during World War II with his sidekick, Eaglet.

Superpowers: Aside from flight, the Eagle has super-strength and invulnerability.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: The Tax Bill's Global Tax Review

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