Major International Tax Changes Ahead: What U.S. Exporters & Multinationals Need To Know

December 3, 2025

New Rules For FDII & GILTI Take Effect For Tax Years Beginning Jan. 1, 2026: Here’s How They Could Impact Your Business

U.S. international tax law is one of the most complicated areas of either tax or law to understand and navigate. This will continue to be the case after the significant updates included in the 2025 Tax Act (a.k.a. the One Big Beautiful Big Act or OBBBA).

This article will highlight significant updates to Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).

In summary:

Profitable U.S.-based C corporations with income from goods or services provided to foreign buyers will likely see a tax cut: a 14% effective tax rate on gross margin from these sales.
U.S. based companies with foreign subsidiaries may see a tax increase if their foreign subsidiaries hold property, plant, and equipment (PP&E)

Want More OBBBA Insights? Check Out Our OBBBA Resource Library

What’s In A Name?

With the new OBBBA provisions, we now have new names and corresponding abbreviations for the international tax concepts FDII and GILTI.

“FDII” and “GILTI” are no longer the names for these two international tax concepts. Now, “FDII” is referred to as “FDDEI” or “Foreign-Derived Deduction Eligible Income,” and “GILTI” is referred to as “NCTI” or “Net CFC Tested Income.”

These provisions operate similarly to the pre-OBBBA regimes, but with a crucial difference: there is no longer a “deemed tangible return” concept.

FDDEI (Formerly FDII): What’s Changing & Why It Matters

FDDEI, and its predecessor, FDII, provide a special deduction to C corporations with “foreign-derived income.” Before OBBBA, taxpayers computed foreign-derived income, adjusted it for allocable SG&A (selling, general, and administrative) expenses such as interest and R&D (research and development), and then further reduced it by a deemed 10% return on QBAI (qualified business asset investment), which generally is a proxy for average PP&E. The higher the result of this computation, the larger the deduction permitted to the taxpayer.

Crucially, the deduction is limited to the taxpayer’s taxable income without the deduction, meaning that taxpayers who are in taxable losses for a year, will lose the benefit permanently for that year.

The change to FDDEI is likely to be positive for the taxpayers impacted. The updates to this provision can be split into the following:

General calculation attributes
Updates to eligible ‘foreign-derived’ income
Eligible deductions

Updates To General Calculation Attributes

QBAI is no longer a relevant concept and will not reduce the deduction amount by a 10% deemed rate of return. This is highly consequential. Previously, the QBAI rule had the potential to completely remove any benefit from this deduction, owning notable amounts of PP&E.

Updates To Eligible Foreign-Derived Income

Income or gain on sale or disposition of intangible or real property subject to depreciation, amortization, or depletion is no longer includable in calculating FDDEI. This change seeks to eliminate the benefit a taxpayer may have received by selling its intangibles or depreciable property outside of the U.S.

Updates To Allocable Deductions

Interest expenses and R&D are no longer required to be allocated to reduce foreign-derived income. This change will increase the potential deduction, particularly among taxpayers that have significant interest and/or R&D expenses.

OBBBA also made a small decrease in the percentage of all of this income. This ultimately translates to the deduction (from 37.5% to 33.34% of this net income, raising the effective rate of tax on this income from 13.125% to 14%).

The Takeaway

As with any tax provision, the net of these updates will vary by taxpayer and by year. However, in general, the following provisions would be expected to have the following impacts:

Removal of QBAI. – Favorable when held in the U.S. Unfavorable when held outside the U.S.
Updates to eligible income. – Favorable
Updates to allocable deductions. – Favorable (will increase the deduction)
Update to the rate. – Unfavorable

Moreover, since this deduction is limited to taxable income, taxpayers should consider planning elective deductions (such as bonus depreciation or research capitalization) or accounting method changes to see how these actions may limit or increase the FDDEI deduction.

SEE THE TABLE BELOW

Facts:

U.S. Company generates Foreign-Derived Deduction Eligible Income (FDDEI) of $100 (gross sales minus Cost of Goods Sold (COGS)).
U.S. Company has 100x of Research and Experimental (R&E) and interest, collectively, as properly allocable, and 2,000x of Qualified Business Asset Investment (QBAI).
Assume for expense allocation purposes that the asset values used to produce Deduction-Eligible Income (DEI) and FDDEI are in the same proportion as the gross DEI and FDDEI.

FDII (PRE-OBBBA)		FDDEI (POST-OBBBA)
Gross DEI	$300	Gross DEI	$300
Gross FDDEI	$100	Gross FDDEI	$100
Allocation Percentage for Expenses	33%	Allocation Percentage for Expenses	33%
R&E and Interest Allocable to FDDEI	$(33)	R&E and Interest Allocable to FDDEI	$ –
Net DEI (DEI less total R&E and Interest)	$200	Net DEI (DEI less total R&E and Interest)	$200
Net FDDEI (DEI less total R&E and Interest)	$67	Net FDDEI (not reduced by R&E and Interest)	$100
(FDDEI/DEI)	33%	(FDDEI/DEI)	50%
QBAI ($2,000 * 10%)	$(200)	QBAI (0%)	$ –
FDII (DEI – QBAI) * (FDDEI / DEI)	$ –	FDDEI	$100
Deduction Percentage	37.50%	Deduction Percentage	33.35%
FDII Deduction	$ –	FDDEI Deduction	$(33)
Impact on Tax Liability	$ –	Impact on Tax Liability	$(7)

Tax Rate Benefit on FDDEI	0.00%	Tax Rate Benefit on FDDEI	-7%

NCTI (Formerly GILTI): New Challenges For U.S. Companies With Foreign Subsidiaries

The net result of the updates to NCTI (formerly GILTI) is likely to be negative for taxpayers who are impacted by this provision, which is applicable to Controlled Foreign Corporations (CFCs) of U.S. taxpayers. The provision, both pre- and post-OBBBA, is somewhat inverse of FDDEI.

NCTI operates, in theory, to tax income associated with intangible income earned outside the U.S. Its base is “tested income”, which had been reduced by a 10% return on QBAI, with a special deduction (Section 250 deduction) and a foreign tax credit (FTC) permitted against the resulting tested income which, pre-OBBBA, provided for an effective tax rate on this income of 13.125%. Apportioning of expenses for FTC purposes also served to reduce the FTC limitation (reducing the benefit of the credit) and thereby increased the tax effect of this provision.

Like FDDEI, QBAI is no longer an attribute and is not included in the calculation of NCTI. This will be significant for taxpayers who have sizeable amounts of property internationally that historically received the benefit of the 10% deemed return on QBAI to reduce tested income.

Overall: As with FDDEI, the net effect of these changes will vary by taxpayer, but broadly speaking, the updates can be considered as follows:

Reduction of Section 250 deduction from 50% to 40%. – Unfavorable
Increase of GILTI basket foreign tax credit limitation from 80% to 90%. – Favorable
Removal of QBAI. – Unfavorable
Interest and R&D expense allocation updates. – Favorable

SEE THE TABLE BELOW

Facts:

CFC 1 generated 100x of net tested income, 250x of QBAI, and 12x of foreign taxes.
CFC 2 generates 25x of net tested loss, 5x of QBAI, and no foreign taxes
Assume no Section 250 taxable income limitation, high-tax exception, specified interest expenses, etc.

GILTI (PRE-OBBBA)		NCTI (POST-OBBBA)
Net Tested Income (U.S. shareholder’s share) ($100 tested income less $25 tested loss)	$75	Net Tested Income (U.S. shareholder’s share) ($100 tested income less $25 tested loss)	$75
QBAI (10%)	$(25)	QBAI (0%)	$ –
GILTI (U.S. shareholder share)	$50	NCTI (U.S. shareholders’ share)	$75

CFC Tested Income	$100	CFC Tested Income	$100
Inclusion %	50%	Inclusion %	75%
Foreign Taxes	$12	Foreign Taxes	$12
Total Deemed Paid ($12 * 50% * 80%)	$5	Total Deemed Paid ($12 * 75% * 90%)	$7

Gross GILTI	$50	Gross NCTI	$75
Section 78 Gross Up ($20 * 50%)	$6	Section 78 Gross Up ($20 * 75%)	$9
GILTI Before 250 Deduction	$56	NCTI Before 250 Deduction	$84
Section 250 Deduction (50%)	$(28)	Section 250 Deduction (40%)	$(34)
Total Impact to Taxable Income	$28	Total Impact to Taxable Income	$50
Tax Before Foreign Tax Credit	$5.88	Tax Before Foreign Tax Credit	$10.58
Foreign Tax Credit (lesser of Deemed Paid or Tax Before Foreign Tax Credit)	$(4.80)	Foreign Tax Credit (lesser of Deemed Paid or Tax Before Foreign Tax Credit)	$(7.20)

Incremental Tax	$1.08	Tax Rate Benefit on FDDEI	$3.38

Strategic Implications: Opportunities, Risks, & Planning Considerations

The updates to both of these sections provide opportunities and challenges for taxpayers, although the elimination of QBAI is a simplifying feature. On balance, with respect to FDDEI, the updates are likely to be favorable, and the nature of the updates incentivizes sales of goods and services internationally while maintaining ownership of intangible and real property by the U.S. taxpayer.

With respect to NCTI, the updates are likely to be unfavorable, and the nature of the updates is to disincentivize U.S. taxpayers from maintaining PP&E outside the U.S.

As noted, this area of tax is exceedingly complex, so do not hesitate to reach out to the GBQ international tax team with any further questions or clarifications related to these updates.

By Mark Silvaggio, JD, CPA, Director, Tax & Advisory, Tyler Gabalski, CPA, Senior Manager, Tax & Advisory, & Jackson Howard, CPA, Senior Associate, Tax & Advisory