Key Takeaways
- The One Big Beautiful Bill Act made some important changes to the U.S. international tax code.
- Aside from smoothing out some kinks, the system changed how the foreign income of U.S. companies is taxed.
- The changes reverse some of the philosophies behind the 2017 Tax Cuts and Jobs Act.
- The OBBBA also leaves questions about how the U.S.-OECD agreement on global taxes will work.
- Countries are still looking to digital services taxes as a way to update their tax systems.
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
G7 Deal's Details To Dictate How US Cos. Fare Under Pillar 2 – Dylan Moroses, Law360 Tax Authority ($):
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 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:
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.
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.
