Where's the TP in OB3?

While you won’t find a transfer pricing provision (or, indeed, even the term “transfer pricing”) in July’s One Big Beautiful Bill (OB3) Act, the sweeping tax bill nonetheless has significant implications for how multinational enterprises structure and price their intercompany transactions. Let’s cover a few of the most important examples (generalized and simplified for your sanity):

• Global Intangible Low-Taxed Income (snappily renamed “Net CFC Tested Income”, or NCTI, in the bill) and Foreign-Derived Intangible Income (now “Foreign-Derived Deduction Eligible Income”, or FDDEI) – introduced in 2017 and intended to incentivize US-based value-added investment and intangible ownership – remained largely unchanged in terms of top-line rates. However, the elimination of the Qualified Business Asset Investment (QBAI) exception from their calculation removed a questionable implicit incentive to inflate foreign fixed asset base while minimizing domestic PP&E. Taken together, these changes, all things equal, reward transfer pricing models with relatively higher allocation of income to US corporations.
• Section 174A: This section restores immediate expensing of domestic research and experimentation costs. These had been required to be capitalized and amortized over five years.  OB3's reintroduction of immediate expensing - while leaving in place the 15-year amortization requirement for offshore R&E costs - increases the advantage of transfer pricing models featuring US-source development activities, often including those performed on behalf of foreign affiliates.
• Base Erosion and Anti-Abuse Tax (BEAT): This punitive tax on most expenses incurred from payments made to non-US affiliates (cost of sales for physical products being notable exception) was made permanent at 10.5% for tax years beginning after December 31, 2025, reversing a planned gradual increase to 12.5%. This is good news for companies with transfer pricing structures featuring material outward payments, but the interaction with the above mentioned NCTI and FDDEI incentives have a potential downside. For example, US corporations considering a new TP model in which the US acts as a global "principal" earning residual/nonroutine profits may plan on converting foreign entities to captive service providers earning limited margins via expense reimbursements from the US principal. To the extent such payments are for R&E activities, the 15-year amortization under Section 174A may have a near-term cash tax impact, while BEAT may also apply to such payments (along with other types of service, royalty, and interest payments).

A lot to unpack - but the lesson I am internalizing, and encouraging my clients to as well, is that tax planning discussions should include experts across all relevant disciplines. My "owe you lunch" list has grown to include my colleagues from International Tax and Research and Development taxation, who have now come to expect my barrage of meeting invitations to weigh in on planning ideas. Still, it's a small price to pay for ensuring holistic perceptive and risk management.