Tax News & Views International Weekly: The Export Income Deduction

Last month, the left-leaning Institute on Taxation and Economic Policy published an analysis, claiming that 88 major U.S. companies paid no income tax for 2025, despite reporting profitable years in public filings.

While some said the report compared apples to oranges—payments under the tax code and profits through financial statements, two separate measurements—ITEP’s assertion was picked up by several Democratic office-holders as evidence that the tax system needs a revamp, including Sen. Elizabeth Warren and Sen. Chris Murphy.

The report outlined several of the specific policies that led to reduced tax payments. Some were recently extended by the One Big Beautiful Bill Act, such as 100% bonus depreciation for certain investments. Another was the credit for research and development spending, which has strong bipartisan support.

ITEP also highlighted the 33 percent deduction for income from sales abroad–now called foreign-derived deduction-eligible income, although in 2025 it was still foreign-derived intangible income. Several companies, including Halliburton Co. and Walt Disney Co., reported major tax savings through that deduction. It’s a sign that FDDEI could get more political attention in the future, especially in a Democratic-controlled Congress looking for new sources of revenue.

The original idea behind FDII was, in part, to compete with countries that have established patent boxes, or regimes with low tax rates for income from valuable intangible assets, such as intellectual property. FDII was enacted by the TCJA in 2017, along with the tax on global intangible low-taxed income (GILTI), now known as net CFC tested income (NCTI). FDII and GILTI both used a formula to approximate intangible income, carving out a percentage based on the amount of tangible, depreciable property held by the same company. While FDII acted as an incentive for companies to keep IP in the U.S., GILTI was an anti-abuse rule, taxing foreign income when it otherwise would have received a full exemption under the TCJA’s partial territorial regime.

The OBBBA tweaked both FDII and GILTI, giving them their new names and removing the tangible carveout. It also raised the rates on both, to 14 percent for FDDEI and 12.6 percent for NCTI. (Because of a 10 percent reduction in foreign tax credits for NCTI, the effective tax rate could be 14 percent, roughly equal to the rate on FDDEI.) The effect of these changes was to make FDDEI more valuable and NCTI more punishing–perhaps in keeping with the Trump administration’s “Make America Great Again” philosophy to encourage domestic manufacturing and activity.

With or without the intangible aspect, some may question why it is necessary to grant such favorable treatment to so many of the largest conglomerates. This could be especially true as the rest of the world adopts the Pillar Two 15% global minimum tax, that could encourage countries to enact less generous tax regimes that would reduce the incentive to move IP abroad.

Democrats previously considered repealing FDII as part of the 2022 Build Back Better Act, but the idea was dropped for the legislation that ended up passing, the Inflation Reduction Act. The Biden Administration said repealing FDII would have raised nearly $160 billion over 10 years, and it could be higher now that the benefit has expanded.

Noteworthy Items This Week

Why Trump's 2nd Global Tariff May Fare Better On Appeal – Dylan Moroses, Law360 Tax Authority ($):

But according to Josh Zive of Bracewell LLP, the government may have a better chance of earning a favorable ruling at the Federal Circuit than it did in its last attempt to defend the emergency duties, which were eventually struck down by the U.S. Supreme Court.

Unlike the duties that were imposed under the International Emergency Economic Powers Act, a law that made no mention of the word "tariff," Zive said, the temporary global tariff Trump imposed under Section 122 of the Trade Act provides him explicit authority to impose those duties under certain economic conditions.

"I think it's important for people to not group them together, because that difference really is important," Zive said. "If there's any room for deference, a strong advantage goes to the executive, and that's a fundamentally different place than the IEEPA case."

Treasury, IRS Officials Question AI’s Role in Transfer Pricing – Alexander F. Peter, Tax Notes ($):

Artificial intelligence can become an important tool in transfer pricing, but a cautious approach is required, and large language model results need to be tested by a human for reliability, IRS and Treasury officials said.

While AI is rapidly being integrated into transfer pricing practices for a wide variety of applications, including data retrieval and transfer pricing analysis, the officials said that it remains unclear whether the technology can replicate the sound legal judgment required under section 482.

IRS Boosting Tax Dispute Talks With Difficult Jurisdictions – Caleb Harshberger, Bloomberg Tax ($):

The IRS is increasing informal talks with other tax authorities to speed up progress on bilateral advance pricing agreements, and is urging taxpayers to communicate more actively to speed tax dispute negotiations, an agency official said Monday.

The agency is also updating guidance that details procedures governing APAs, John Wall told an event hosted by Alston & Bird.

Work on Revenue Procedure 2015-41 is “very, very, very far along,” he said, with the Treasury Department and counsel’s office meeting regularly on it. He didn’t give a timeline for completion.

Australia’s IP Royalties Tax Stance Leaves Multinationals Wary – Deborah Nesbitt, Bloomberg Tax ($):

Multinational companies should check their governance of related-party contracts, given Australia’s controversial stance on taxing intellectual property royalties, tax professionals say.

The Australian Taxation Office’s response to the High Court’s ruling in the case it lost last August to PepsiCo Inc . shows the agency will continue “its highly proactive agenda” on taxing intangible assets like IP, focusing on royalty payments to offshore IP holders, said Mallesons tax partner Michael Clough.

The High Court ruled last August in PepsiCo that a bottler’s payments for concentrate didn’t include “embedded royalties,” and so weren’t liable for withholding tax or diverted profits tax.

Negotiating in the Dark: The U.N. Talks and Case for Treaty Impact Reviews – Nana Ama Sarfo, Tax Notes ($):

However, there remains a lack of thorough analysis from developed countries — whether in the form of spillover studies or other comprehensive reviews — examining how their tax systems and treaty policies affect developing countries. Ireland and the Netherlands have publicly pursued those analyses, and the European Commission has created a toolbox to aid EU member states with similar analyses. Yet national treaty impact reviews that are available to the public remain rare. Given the discussions at the U.N., countries should revisit these ideas, particularly because governments — and businesses — need more data as they navigate the U.N. framework convention process while also considering new model treaty provisions created for the U.N. model tax convention.

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: Airboy

Debut Year: 1942

Debut Publication: Air Fighter Comics #2

Origin Story: Son of a famed aviator who died in a plane crash, he decided to follow his father's footsteps, with a specialized plane built by the Franciscan monks who raised him..

Superpowers: No superpowers, but his plane "Birdie" can flap its wings like a bird, can be flown remotely, and has other technological advancements..

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.