August 5, 2025 • 26 mins
Eric Flueckiger, a partner with our international tax specialty practice, and Michael Cornett, the international tax leader in in our Washington National Tax Office, will look at how the One Big Beautiful Bill Act affects international tax concepts.
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(00:01):
On this episode, we'll look intohow the recently passed tax act, often
referred to as the One Big Beautiful BillAct, affect international tax contacts.
We welcome Eric Flueckiger a partner
in the firm's international taxspecialty practice, and Michael Cornett,
the international tax leaderin our Washington National Tax office.
(00:22):
From your one stop for tax updatesand analysis, I'm Iris And I'm Devin.
It's Tuesday August 5thand this is Tackling Tax.
(00:48):
Well, Devin,
it is never a dull moment around hereis it?
No, definitely not.
I'm starting to think that maybewe should rename our show to Tackling
Tariffs with as much tariff news as thereis, for example, the new EU trade deal.
But outside of tariffs,there's also the possibility
of a second reconciliation bill,if you can believe it.
(01:10):
So with that, let's dive rightinto our Fast Four stories of the week.
For our first story, let's diveright into the EU-U.S.
tariff deal.
Now, this deal is a bit more nuancedthan just a flat rate
across the board. And
it comes on the heels of the U.S.-Japantrade deal from a couple of weeks ago.
(01:31):
To reach this agreement,there were some concessions
that had to be made on both sides.
For most EU exports, for example,there's going to be a 15% tariff rate
that will be implemented on things likecars, semiconductors and pharmaceuticals.
This dealalso includes zero-for-zero tariffs,
which means that neither sidewill impose tariffs on certain products
(01:52):
that are going to include things
like aircraft, certain chemicals,semiconductor equipment,
natural resources,and certain agricultural products.
Additionally, steel and aluminum tariffs were discussed
but there seems to be some variancein the announcements from both sides
on exactly what this means,so more to come there.
(02:14):
Further, energy cooperation will beincreased with the EU purchasing more U.S.
energy products.
Now, ultimately, this deal was set upto implement a framework
for future cooperationbetween the two jurisdictions.
So when you say that though, Devin,does that mean
that the 15% ratecould be lower in the future or no?
(02:34):
Yeah, it certainly does mean that.
Now, Iris, I do
have a question unrelated to tariffs.
What is more beautiful than one big,beautiful bill?
Oh, good grief.
Well, so basicallythat leads us into our second story.
I think you're trying to get at the factthat they're talking about
(02:55):
a potential secondreconciliation package later this year.
Unofficially, we've seen it,at least one source being referred
to as the “2 Big 2 Beautiful” bill.
So, I think we're getting a little tonguein cheek there just with our naming.
But all of that to say,the talk has been that
it might be late-fall time frameif this were to happen.
(03:17):
But, you know, it could include thingslike technical corrections,
some things that didn't make it into
the One Big Beautiful Bill Actbecause of Byrd rule limitations.
And in that sort of thing.
All right,so a question: if it didn't make it
into the One Big Beautiful Bill Actbecause of the Byrd Rule,
why would things be differentfor the “2 Big 2 Beautiful” bill?
(03:42):
Good question.
I think the thought, right, is thatthey would probably redraft the provisions
to address the concernsthat the parliamentarian had with OBBBA.
So, ultimately,it would pass this go around.
Other things that could be inthere are further changes to Medicaid
and even some possibleincreases to the 199A QBI deduction
(04:04):
that were originally consideredin the OBBBA House version.
So that would be an increaseto the rate at 23% there.
For our third itemat the National Association of Enrolled
Agents Tax Summit, which, by the way,sounds like a real barnburner.
IRS Commissioner BillyLong said that the opening of the 2026
(04:26):
filing season isn't targeted until aroundPresident's Day.
So this means the individualsand businesses alike will not be able
to file until around February 17th,only a month away from the March
15th deadline for partnershipsand other pass-through entities.
So why is that, though?
Do you know Devin?
Is it based on changes with OBBBAor other reasons?
(04:50):
As far as I know,they didn't really share any specifics,
but I'd imagine that's probably a,you know, primary contributor.
You know,it is tied to having to update forms,
based on new rules and getting thosechanges coded with e-filing and such.
So that probably is correct.
It sounds like extensionsmight be in folks’ future here shortly.
(05:11):
For our last story, last weekthe IRS adjusted
corporateAMT guidance for partnership investments.
The goal, per the interim guidance,was to simplify the application
of the Corporate Alternative MinimumTax to partners.
Basically, there are now more methodsfor corporations trying to calculate
their adjusted income attributableto their partnership investments.
(05:34):
Other things were included in the notice
as well, things like reportingrequirements and clarification
that corporations can disregardincome from non-realization events.
The notice issued referencesthat there will be proposed
rules forthcoming on the topic as well.
And with that, let's move on to our nextsegment, Planning Insights.
(06:01):
This segment we call Planning Insights,where we examine
current events in the tax worldand some of the resulting strategies.
Today's Insightsis all about international tax
and how the One Big Beautiful Bill Actchanged things in this space.
We are so lucky to have Michael Cornettand Eric Flueckiger
join us as our guests this episode.
Welcome to the show, Eric and Mike.
(06:24):
Thanks, Iris, happy to be here.
Well Mike,we'll go ahead and start with you.
I was hoping could you just kind of setthe stage for us a bit?
You know, tell uswhat's been going on recently
in the international tax world, maybeother than the One Big Beautiful Bill Act.
You know, I hear a lot about Pillar Two,and, just was kind of wondering about
(06:47):
how that and other things fit together,or influence each other, with the Act.
Yeah, certainly happy to talkabout a couple things that are going on.
One, like you say is the Pillar Twois still out there, even though Treasury
and OECD/G7 say
they're working to dealwith, making sure the U.S.
(07:09):
tax system is compliant with Pillar Two
that's still in the works, waiting to see kind of what happens.
In the meantime, companies reallyshould be still preparing to file reports
and file their first tax returnsnext year under Pillar Two.
But maybe by then we'll have an agreementwhich would hopefully exempt
(07:30):
at least some U.S.
multinationals from having to be subjectto the Pillar Two rules there.
So, I think, you know,that's a development
that continues to watch, be watched.
And we'll have to see how it goes.
I think the other thing,
while you may not call itinternational tax is just tariffs.
I mean, tariffs is definitely in the newsand I think just keep an eye on it,
with August 1st coming up, to see whatPresident Trump's going to do next.
(07:57):
That’s awesome Mike, thank you so much.
Eric, I do want to talk about the Actthat just passed.
And I was wondering if you can maybewalk us through some of those provisions,
but again, trying to keep itnot too technical.
Can you maybe just kind ofgive us some background on what the
primary changes are and maybe, you know,are they good changes for taxpayers?
Are they bad? Is it a wash?
(08:17):
From a practical standpoint,what's it looking like?
Yeah.
I mean, generallythe international tax provisions, I would
say, are likely favorable for taxpayers.
I think there are a lot of items in therethat, you know, that are going
to helpfrom a foreign tax credit position
(08:37):
from foreign derivedintangible income deductions.
And then also,
just from an overall effective tax rateplanning, especially if you layer
on what we would call domestic provisions,section
174 deductions and 163J.
But generally, I think for the most partit's going to create a need for modeling
(09:01):
because I think there's a lot of interplaybetween all these provisions
that's going to be requiredin order for us to really understand
what the true impact is.
And I think it's going to be on afact-by-fact basis, on an entity-by-entity
basis.
It's not going to be the same answerfor all taxpayers.
So you know, you mentionedsome of those changes just now.
(09:23):
I think when we had talkedpreviously there'd sort of
been four groupings as you described.
I have in my notes CFC Section 250,Foreign Tax Credit and BEAT,
which all is a lot of international taxtalk for things
that I don't know a lot about.
So I was kind of hoping we could tacklethose groupings one by one.
(09:43):
The first being CFC changes.
So for those listeningand maybe less familiar with international
tax, what is a CFC exactly?
So a CFCis a controlled foreign corporation.
And I think
at the highest level, you could define itas a foreign subsidiary that that a U.S.
company owns.
(10:03):
And there has to be at least 50% ownershipby U.S.
persons, by either U.S.
individuals or a U.S.
corporation.
So, 50% ownership in a foreign subsidiary.
And were U.S shareholders
taxed on that income or not?
Historically, there's been
several ways that, that U.S.
(10:25):
shareholderscould be taxed on CFC income.
It could be by either an actual distribution of earnings.
So, a dividend that’s paid up, cash
dividend paidup, from the foreign entity to the U.S.
And there's also severalcomplicated rules
that generate deemed dividendsor deemed inclusions of that CFC income
(10:47):
that U.S shareholders would haveto recognize on an annual basis.
And that's regardlessif they're an individual or a corp or...?
Correct.
Yeah, it would be for both corporationsand individuals.
The deemed inclusionscan include subpart F income,
which is it's been around since, I think the 1960s.
(11:08):
And then there's also a newer, deemedinclusion rule called GILTI, Global
Intangible Low Taxed Income,which was passed with the 2017 Tax Act.
And then there's also section956 deemed inclusions as well.
So those are the three itemsthat could be picked up as income on
an annual basis where the U.S.
(11:30):
shareholder, whether it's a corporationor an individual, actually receives
any cash from thefrom the foreign subsidiary.
So that's kind of setting the base, right?
What changed with the Act?
Yeah.
So GILTI has kind of been
the focus, I think, since 2017.
(11:50):
And the way GILTI works is each yeara U.S.
shareholder has to compute taxableincome of that
controlled foreign corporation or CFC.
And then there is a, historicallythere's been a reduction
of that income by 10% of the CFCsinvestment in fixed assets,
(12:10):
net book value of fixed assetsand that's referred to
as Qualified Business AssetInvestment or QBAI.
So, with the new tax act that was passed,
that 10% reduction of taxable incomeis no longer available.
So, there's no longer an exclusionfor QBAI
when determining GILTI on an annual basisfor U.S.
(12:32):
shareholders.
Also, when a U.S.
shareholder has to recognize the GILTIinclusion, corporations
have historically been allowedto also reduce the inclusion by 50%.
That’sa Section 250 deduction under GILTI
(12:52):
that deduction is now going to 40%.
And there's a difference herebetween how corporations
recognize GILTI and individualsrecognize GILTI.
So corporations like I said get a
deduction under Section 250.
That's now 40% of the GILTI inclusion.
(13:13):
And there's also a deemed paid foreigntax credit available.
That could offset any U.S.
tax on that leftover residual inclusionafter the 250 deduction.
Individuals do not get those benefits.
So, individuals have to recognizeGILTI in total and
do not get a 250 deduction or a foreigntax credit unless a certain election
(13:36):
is made to essentiallytreat the individual owner as if
it were a corporation.
Gotcha. So,
thinking back now, okay, I'm a CFO.
I'm thinking about my business.
Is there anything, practically speaking,I know you mentioned modeling.
You know,are there strategies around this
or what should I,as a CFO, be thinking about?
(14:00):
Yeah, be thinking about
ways to mitigate your deemed inclusionsunder GILTI.
I think, you know, possibly, you know,
making a high-tax exception election.
There's the ability to electnot to recognize
GILTI inclusionsif the effective tax rate in the foreign
(14:23):
jurisdiction is above90% of the U.S corporate rate.
So that's one way to help mitigateGILTI inclusions.
And then also really understanding
what the ultimate impactis from CFC income.
So, what is it?
What is the real tax impactafter recognizing
(14:44):
the income,recognizing the available deductions,
and then also recognizing this,available foreign tax credit?
So it really is getting a handle on itthrough a modeling exercise.
Now there was a changethat I became aware of.
You know, I'm thinking like
I felt guilty for not wearing my necktie,but no one else is.
(15:05):
I don't have to be.
But I've seen the term NCTIbeing thrown around.
GILTI, NCTI. What's...
are they the same thingor are they different?
Maybe Michael,do you want to hop in this?
What changed inwhy did they make the change?
Why...GILTI was kind of a fun name.
It, you know, rolled off the tongueeasily.
Why are we having to call this NCTI now,if that's even what people are calling it?
(15:26):
Yeah.
I mean, well, Erickind of alluded to this removal
of QBAI, the 10%, for the fixed assets.
Taking that out, you've really changedthe way the program works.
So, therefore, you don't have thisglobal low-taxed, or global
tangible low-tax income anymore.
It's all global income subject to tax.
(15:48):
Its just a net CFC-testedincome is now what is subject to tax.
And so therefore GILTI doesn'ttechnically exist anymore.
So are people calling it NCTI then?
Or is it still an unofficial term?
I think it's getting more accepted,but I think still nothing is official
until I think we hear some
more public speakers, but it is a catchyname, as you say, Devin.
(16:10):
Yeah.
So, my understanding though is overallis it just simplified things with GILTI
then and just made it a somewhat easiercalculation?
I mean, on the surfacewhen you look at like Eric says,
it looks like it is beneficial to you,
you know, but again,you really do have to model the impact
because there's so many thingsin this bill overall that impact
(16:31):
the calculations, bothon the domestic side and the foreign side,
that until you model it,you don't know whether it's
really goingto be beneficial or not. Gotcha.
Thank you.
I mean, speaking of beneficial, right.
Most people think of the foreigntax credit as something that's beneficial
to them.
What changes were thereon that one, Eric?
(16:53):
So, for the foreign tax credit,there are some changes related
to the recognition of foreign sourceincome when you have a U.S.
manufacturer who's selling U.S.-made,U.S.-produced
goods through a foreign branch.
(17:13):
So, a foreign subsidiary
that is treated as a disregarded entityor a true foreign branch.
So, in that situation,you have 50% of the income
that's generated from that activitythat's in the U.S.
is actually allowed to be treated
as foreign-sourceincome in the foreign-branch category.
(17:34):
So that could help taxpayerswho have been historically,
limited in the foreign-branch category.
For foreign tax credit purposes,you get income
that really isn't tied to any real foreign tax there.
But it's still treatedas foreign-source income.
So that's a positive.
With GILTI
(17:56):
or NCTI now or NCTIhowever you want to call it,
you know, in the foreign tax credit,
historically there's been a 20% haircut,
for the amount of taxes available.
So the foreign taxes that are paidby that CFC,
you only get to include80% of those foreign taxes
(18:19):
in your foreign taxcredit analysis to offset any U.S.
tax on your deemed inclusion.
That has been increased to 90% now.
So, the haircut has been decreased there.
So, there's also been changesto the amount of foreign taxes
available,when an actual distribution is made
(18:42):
from a CFC that is of earningsthat have already been taxed in the U.S.
So previously taxed earnings and profits, those distributions
may be subject to foreignwithholding tax.
And before the the new act was passed,the 2025 act was passed.,
there was no limitationon the amount of withholding tax
(19:03):
that would be available for foreigntax credit purposes.
Now, there's a limitation of
10% of
the amount of foreign taxes available.
So, similar to the 10% haircuton the deemed paid credit, there's now
a 10% haircut on withholding taxes
(19:24):
for NCTI PTIP.
Mike, I want
to move over to youand talk about the section 250.
Doesn't seem like there's a flashy acronymhere, but what is section 250?
What do we need to be aware of there?
Yeah, I think on the 250, you know, Erickind of mentioned part of it
(19:45):
as it related to the GILTI or NCTIthat there's a 250 deduction
that applies to that type of income.
But in general, high-level,250 was a deduction created
when the TCJA passed to help reducecertain types of income, reduce
the effective tax rate on that incomeby giving special deductions to U.S.
(20:05):
corporations.
So like, as Eric said on the GILTI sidefor that type of income
that got picked up, you got a 250deduction, which kind of brought
the tax rate down,and made income around 10.5%.
The other basket of income, which goes by the acronym of FDII
or in the new worldit's going to be FDDEI.
(20:26):
Because again, the change in that 10%of the fixed assets
that is the income that a U.S.
corporation earns from,you know, what I'll call export
sales, export services, royalties from,you know, foreign persons,
all unrelatedso that, you know, encouraging U.S.
companies to do things in the U.S.
(20:47):
and because it's comingfrom foreign sources
so to speak, you know, foreign payors,then the U.S.
government said, or Congress said, let's,you know, give a 250 deduction for that
income as well.
And that effectivelykind of brought the rate down to 13.125%
(21:07):
under the original law.
So what's kind of happened herethey've made some changes to that, with,
you know, the way they allocate
some expenses and doing the calculation,they did lower the deduction on FDDEI,
they've made some again,some minor adjustments, you know, so
effectively the effective tax ratenow today's around 14%.
(21:29):
So still,
you know, a great benefit for companiesto make sure they're capturing all those,
you know, sales, services, royaltiesinto that calculation.
Again, you know, when you look at yousay, hey, it's a very positive change
when it's in isolation,but because of other changes,
whether, you know, to 174, 163J, bonusdepreciation,
(21:51):
you know, it all comes back to
you need to model to see what kindof impact you really have on that.
And what choices you need to make.
Well, that's a lot.
I thinkwe've covered three of our four buckets.
Last but not least, Mike,we'll stick with you.
How about BEAT?
What's changed?
BEAT, Base Erosion Anti-Avoidance Tax is
(22:12):
probably the one that had the least amountof changes of the three.
Basically,it increased the rate from 10 to 10.5%.
Made it permanent at that 10.5% rate.
And then it took away a provisionthat most people consider harmful here.
In 2026,you were going to lose the ability to use
certain creditslike R&D in your BEAT calculations.
(22:35):
But they took away that exclusion.
So now you're back to still havingfull credits available for that.
So, I mean, the BEAT was in itselfvery, you know,
I would say very helpful changeseven though the rate went up a little bit.
Again, we had similar issues.
Depending on what you do in other codesections, you know,
you may actually put yourselfinto a BEAT situation.
(22:57):
So, you really...
it gets back to what I like to say.
It's modeling.
Cool.
Well, Eric,I know there's...we have now the act,
but is there going to be regs coming outthat need to
iron out some of the gray areas here?
Like dowe think there's going to be more guidance
comingor is kind of what we have what we have?
(23:17):
Oh yeah,I think there needs to be more guidance.
We'll see regulations,I think, at some point.
You know, thinking back,there's still quite
a few questionson several of these provisions.
You know,I think about section 250 deduction
and changes to our expenseallocation and apportionment.
(23:38):
There’s a lot of questions aroundthat that I think will be helpful
with regulations, with clarity,and then going through the process
of feedback and responses from taxpayers
as well.
Great.
Well, Mike,I think to wrap this up, the one word
that I keep hearing from you is modeling,modeling, modeling.
(24:00):
Is that right?
Yeah, it really is. Right.
I mean, you know, there'sso many provisions in this bill,
you know, that were,you know, made from it,
whether it's bonus depreciationor whether it's the R&D expensing.
Again, whether it's 163J limitations,you know?
Those will all impactthe decisions you make.
(24:21):
They will impact all the changes thathave happened in the international space.
Whether it's GILTI,you know, FDII to 250 deduction.
And the only way I think you can make aninformed decision instead of just saying,
hey, I'm going to choose to expense R&Dand make up for everything there.
I think you're going to have to do somemodeling just to see what the impact is.
Again, you could
(24:41):
do something positive on one sideand do something negative on the other
and not having a good answer, that any,and particularly looking forward,
you know, cause maybe some of the changeslike 163J bonus depreciation,
R&D expensing, those are effectivethis year, for your 2025 tax year.
Most of these changes to the internationalprovisions are effective next year.
(25:05):
But decisions you makethis year will impact those next year
as well as your current yearcalculations as well.
So it really is kind of a doublewhammy as it relates to the international.
Great.
Well, thank you both for your time.
I know Devinand I really appreciate you coming and
we'll be looking tohave you back here soon if you'll let us.
(25:27):
Thank you for having us.We look forward to coming back.
Thank you. Thank you both.
Each episode we’ll bring you what we calla Focused FORsight of the week:
an article or recordingthat might be of interest to you.
This week's Focused FORsight is an articlethat expands on our conversation
(25:47):
from today, and it's called “InternationalTax Rebranded:
Key Items in the Reconciliation Bill.”And it can be
found on our WashingtonNational Tax Office website.
Of course, you can always accessour FORsights on the Forvis Mazars U.S.
website more broadly.
And that's our show.
Thanks for joining.
Remember to subscribe and listen in
(26:09):
for the next episode of the podcaston August 19th.
Until next time...
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the analysis and conclusionsof the panelists based upon his, her,
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Such analysis and conclusionsshould not be deemed
(26:30):
opinions or conclusions by Forvis Mazarsor the panelists
as to any individual situationas situations are fact-specific.
The listener should performtheir own analysis
and form their own conclusionsregarding any specific situation.
Further, the panelists’ conclusionsmay be revised without notice,
with or without changes in industryinformation and legal authorities.
On this episode, we'll look intohow the recently passed tax act, often
referred to as the One Big Beautiful BillAct, affect international tax contacts.
We welcome Eric Flueckiger a partner
in the firm's international taxspecialty practice, and Michael Cornett,
the international tax leaderin our Washington National Tax office.
(00:22):
From your one stop for tax updatesand analysis, I'm Iris And I'm Devin.
It's Tuesday August 5thand this is Tackling Tax.
(00:48):
Well, Devin,
it is never a dull moment around hereis it?
No, definitely not.
I'm starting to think that maybewe should rename our show to Tackling
Tariffs with as much tariff news as thereis, for example, the new EU trade deal.
But outside of tariffs,there's also the possibility
of a second reconciliation bill,if you can believe it.
(01:10):
So with that, let's dive rightinto our Fast Four stories of the week.
For our first story, let's diveright into the EU-U.S.
tariff deal.
Now, this deal is a bit more nuancedthan just a flat rate
across the board. And
it comes on the heels of the U.S.-Japantrade deal from a couple of weeks ago.
(01:31):
To reach this agreement,there were some concessions
that had to be made on both sides.
For most EU exports, for example,there's going to be a 15% tariff rate
that will be implemented on things likecars, semiconductors and pharmaceuticals.
This dealalso includes zero-for-zero tariffs,
which means that neither sidewill impose tariffs on certain products
(01:52):
that are going to include things
like aircraft, certain chemicals,semiconductor equipment,
natural resources,and certain agricultural products.
Additionally, steel and aluminum tariffs were discussed
but there seems to be some variancein the announcements from both sides
on exactly what this means,so more to come there.
(02:14):
Further, energy cooperation will beincreased with the EU purchasing more U.S.
energy products.
Now, ultimately, this deal was set upto implement a framework
for future cooperationbetween the two jurisdictions.
So when you say that though, Devin,does that mean
that the 15% ratecould be lower in the future or no?
(02:34):
Yeah, it certainly does mean that.
Now, Iris, I do
have a question unrelated to tariffs.
What is more beautiful than one big,beautiful bill?
Oh, good grief.
Well, so basicallythat leads us into our second story.
I think you're trying to get at the factthat they're talking about
(02:55):
a potential secondreconciliation package later this year.
Unofficially, we've seen it,at least one source being referred
to as the “2 Big 2 Beautiful” bill.
So, I think we're getting a little tonguein cheek there just with our naming.
But all of that to say,the talk has been that
it might be late-fall time frameif this were to happen.
(03:17):
But, you know, it could include thingslike technical corrections,
some things that didn't make it into
the One Big Beautiful Bill Actbecause of Byrd rule limitations.
And in that sort of thing.
All right,so a question: if it didn't make it
into the One Big Beautiful Bill Actbecause of the Byrd Rule,
why would things be differentfor the “2 Big 2 Beautiful” bill?
(03:42):
Good question.
I think the thought, right, is thatthey would probably redraft the provisions
to address the concernsthat the parliamentarian had with OBBBA.
So, ultimately,it would pass this go around.
Other things that could be inthere are further changes to Medicaid
and even some possibleincreases to the 199A QBI deduction
(04:04):
that were originally consideredin the OBBBA House version.
So that would be an increaseto the rate at 23% there.
For our third itemat the National Association of Enrolled
Agents Tax Summit, which, by the way,sounds like a real barnburner.
IRS Commissioner BillyLong said that the opening of the 2026
(04:26):
filing season isn't targeted until aroundPresident's Day.
So this means the individualsand businesses alike will not be able
to file until around February 17th,only a month away from the March
15th deadline for partnershipsand other pass-through entities.
So why is that, though?
Do you know Devin?
Is it based on changes with OBBBAor other reasons?
(04:50):
As far as I know,they didn't really share any specifics,
but I'd imagine that's probably a,you know, primary contributor.
You know,it is tied to having to update forms,
based on new rules and getting thosechanges coded with e-filing and such.
So that probably is correct.
It sounds like extensionsmight be in folks’ future here shortly.
(05:11):
For our last story, last weekthe IRS adjusted
corporateAMT guidance for partnership investments.
The goal, per the interim guidance,was to simplify the application
of the Corporate Alternative MinimumTax to partners.
Basically, there are now more methodsfor corporations trying to calculate
their adjusted income attributableto their partnership investments.
(05:34):
Other things were included in the notice
as well, things like reportingrequirements and clarification
that corporations can disregardincome from non-realization events.
The notice issued referencesthat there will be proposed
rules forthcoming on the topic as well.
And with that, let's move on to our nextsegment, Planning Insights.
(06:01):
This segment we call Planning Insights,where we examine
current events in the tax worldand some of the resulting strategies.
Today's Insightsis all about international tax
and how the One Big Beautiful Bill Actchanged things in this space.
We are so lucky to have Michael Cornettand Eric Flueckiger
join us as our guests this episode.
Welcome to the show, Eric and Mike.
(06:24):
Thanks, Iris, happy to be here.
Well Mike,we'll go ahead and start with you.
I was hoping could you just kind of setthe stage for us a bit?
You know, tell uswhat's been going on recently
in the international tax world, maybeother than the One Big Beautiful Bill Act.
You know, I hear a lot about Pillar Two,and, just was kind of wondering about
(06:47):
how that and other things fit together,or influence each other, with the Act.
Yeah, certainly happy to talkabout a couple things that are going on.
One, like you say is the Pillar Twois still out there, even though Treasury
and OECD/G7 say
they're working to dealwith, making sure the U.S.
(07:09):
tax system is compliant with Pillar Two
that's still in the works, waiting to see kind of what happens.
In the meantime, companies reallyshould be still preparing to file reports
and file their first tax returnsnext year under Pillar Two.
But maybe by then we'll have an agreementwhich would hopefully exempt
(07:30):
at least some U.S.
multinationals from having to be subjectto the Pillar Two rules there.
So, I think, you know,that's a development
that continues to watch, be watched.
And we'll have to see how it goes.
I think the other thing,
while you may not call itinternational tax is just tariffs.
I mean, tariffs is definitely in the newsand I think just keep an eye on it,
with August 1st coming up, to see whatPresident Trump's going to do next.
(07:57):
That’s awesome Mike, thank you so much.
Eric, I do want to talk about the Actthat just passed.
And I was wondering if you can maybewalk us through some of those provisions,
but again, trying to keep itnot too technical.
Can you maybe just kind ofgive us some background on what the
primary changes are and maybe, you know,are they good changes for taxpayers?
Are they bad? Is it a wash?
(08:17):
From a practical standpoint,what's it looking like?
Yeah.
I mean, generallythe international tax provisions, I would
say, are likely favorable for taxpayers.
I think there are a lot of items in therethat, you know, that are going
to helpfrom a foreign tax credit position
(08:37):
from foreign derivedintangible income deductions.
And then also,
just from an overall effective tax rateplanning, especially if you layer
on what we would call domestic provisions,section
174 deductions and 163J.
But generally, I think for the most partit's going to create a need for modeling
(09:01):
because I think there's a lot of interplaybetween all these provisions
that's going to be requiredin order for us to really understand
what the true impact is.
And I think it's going to be on afact-by-fact basis, on an entity-by-entity
basis.
It's not going to be the same answerfor all taxpayers.
So you know, you mentionedsome of those changes just now.
(09:23):
I think when we had talkedpreviously there'd sort of
been four groupings as you described.
I have in my notes CFC Section 250,Foreign Tax Credit and BEAT,
which all is a lot of international taxtalk for things
that I don't know a lot about.
So I was kind of hoping we could tacklethose groupings one by one.
(09:43):
The first being CFC changes.
So for those listeningand maybe less familiar with international
tax, what is a CFC exactly?
So a CFCis a controlled foreign corporation.
And I think
at the highest level, you could define itas a foreign subsidiary that that a U.S.
company owns.
(10:03):
And there has to be at least 50% ownershipby U.S.
persons, by either U.S.
individuals or a U.S.
corporation.
So, 50% ownership in a foreign subsidiary.
And were U.S shareholders
taxed on that income or not?
Historically, there's been
several ways that, that U.S.
(10:25):
shareholderscould be taxed on CFC income.
It could be by either an actual distribution of earnings.
So, a dividend that’s paid up, cash
dividend paidup, from the foreign entity to the U.S.
And there's also severalcomplicated rules
that generate deemed dividendsor deemed inclusions of that CFC income
(10:47):
that U.S shareholders would haveto recognize on an annual basis.
And that's regardlessif they're an individual or a corp or...?
Correct.
Yeah, it would be for both corporationsand individuals.
The deemed inclusionscan include subpart F income,
which is it's been around since, I think the 1960s.
(11:08):
And then there's also a newer, deemedinclusion rule called GILTI, Global
Intangible Low Taxed Income,which was passed with the 2017 Tax Act.
And then there's also section956 deemed inclusions as well.
So those are the three itemsthat could be picked up as income on
an annual basis where the U.S.
(11:30):
shareholder, whether it's a corporationor an individual, actually receives
any cash from thefrom the foreign subsidiary.
So that's kind of setting the base, right?
What changed with the Act?
Yeah.
So GILTI has kind of been
the focus, I think, since 2017.
(11:50):
And the way GILTI works is each yeara U.S.
shareholder has to compute taxableincome of that
controlled foreign corporation or CFC.
And then there is a, historicallythere's been a reduction
of that income by 10% of the CFCsinvestment in fixed assets,
(12:10):
net book value of fixed assetsand that's referred to
as Qualified Business AssetInvestment or QBAI.
So, with the new tax act that was passed,
that 10% reduction of taxable incomeis no longer available.
So, there's no longer an exclusionfor QBAI
when determining GILTI on an annual basisfor U.S.
(12:32):
shareholders.
Also, when a U.S.
shareholder has to recognize the GILTIinclusion, corporations
have historically been allowedto also reduce the inclusion by 50%.
That’sa Section 250 deduction under GILTI
(12:52):
that deduction is now going to 40%.
And there's a difference herebetween how corporations
recognize GILTI and individualsrecognize GILTI.
So corporations like I said get a
deduction under Section 250.
That's now 40% of the GILTI inclusion.
(13:13):
And there's also a deemed paid foreigntax credit available.
That could offset any U.S.
tax on that leftover residual inclusionafter the 250 deduction.
Individuals do not get those benefits.
So, individuals have to recognizeGILTI in total and
do not get a 250 deduction or a foreigntax credit unless a certain election
(13:36):
is made to essentiallytreat the individual owner as if
it were a corporation.
Gotcha. So,
thinking back now, okay, I'm a CFO.
I'm thinking about my business.
Is there anything, practically speaking,I know you mentioned modeling.
You know,are there strategies around this
or what should I,as a CFO, be thinking about?
(14:00):
Yeah, be thinking about
ways to mitigate your deemed inclusionsunder GILTI.
I think, you know, possibly, you know,
making a high-tax exception election.
There's the ability to electnot to recognize
GILTI inclusionsif the effective tax rate in the foreign
(14:23):
jurisdiction is above90% of the U.S corporate rate.
So that's one way to help mitigateGILTI inclusions.
And then also really understanding
what the ultimate impactis from CFC income.
So, what is it?
What is the real tax impactafter recognizing
(14:44):
the income,recognizing the available deductions,
and then also recognizing this,available foreign tax credit?
So it really is getting a handle on itthrough a modeling exercise.
Now there was a changethat I became aware of.
You know, I'm thinking like
I felt guilty for not wearing my necktie,but no one else is.
(15:05):
I don't have to be.
But I've seen the term NCTIbeing thrown around.
GILTI, NCTI. What's...
are they the same thingor are they different?
Maybe Michael,do you want to hop in this?
What changed inwhy did they make the change?
Why...GILTI was kind of a fun name.
It, you know, rolled off the tongueeasily.
Why are we having to call this NCTI now,if that's even what people are calling it?
(15:26):
Yeah.
I mean, well, Erickind of alluded to this removal
of QBAI, the 10%, for the fixed assets.
Taking that out, you've really changedthe way the program works.
So, therefore, you don't have thisglobal low-taxed, or global
tangible low-tax income anymore.
It's all global income subject to tax.
(15:48):
Its just a net CFC-testedincome is now what is subject to tax.
And so therefore GILTI doesn'ttechnically exist anymore.
So are people calling it NCTI then?
Or is it still an unofficial term?
I think it's getting more accepted,but I think still nothing is official
until I think we hear some
more public speakers, but it is a catchyname, as you say, Devin.
(16:10):
Yeah.
So, my understanding though is overallis it just simplified things with GILTI
then and just made it a somewhat easiercalculation?
I mean, on the surfacewhen you look at like Eric says,
it looks like it is beneficial to you,
you know, but again,you really do have to model the impact
because there's so many thingsin this bill overall that impact
(16:31):
the calculations, bothon the domestic side and the foreign side,
that until you model it,you don't know whether it's
really goingto be beneficial or not. Gotcha.
Thank you.
I mean, speaking of beneficial, right.
Most people think of the foreigntax credit as something that's beneficial
to them.
What changes were thereon that one, Eric?
(16:53):
So, for the foreign tax credit,there are some changes related
to the recognition of foreign sourceincome when you have a U.S.
manufacturer who's selling U.S.-made,U.S.-produced
goods through a foreign branch.
(17:13):
So, a foreign subsidiary
that is treated as a disregarded entityor a true foreign branch.
So, in that situation,you have 50% of the income
that's generated from that activitythat's in the U.S.
is actually allowed to be treated
as foreign-sourceincome in the foreign-branch category.
(17:34):
So that could help taxpayerswho have been historically,
limited in the foreign-branch category.
For foreign tax credit purposes,you get income
that really isn't tied to any real foreign tax there.
But it's still treatedas foreign-source income.
So that's a positive.
With GILTI
(17:56):
or NCTI now or NCTIhowever you want to call it,
you know, in the foreign tax credit,
historically there's been a 20% haircut,
for the amount of taxes available.
So the foreign taxes that are paidby that CFC,
you only get to include80% of those foreign taxes
(18:19):
in your foreign taxcredit analysis to offset any U.S.
tax on your deemed inclusion.
That has been increased to 90% now.
So, the haircut has been decreased there.
So, there's also been changesto the amount of foreign taxes
available,when an actual distribution is made
(18:42):
from a CFC that is of earningsthat have already been taxed in the U.S.
So previously taxed earnings and profits, those distributions
may be subject to foreignwithholding tax.
And before the the new act was passed,the 2025 act was passed.,
there was no limitationon the amount of withholding tax
(19:03):
that would be available for foreigntax credit purposes.
Now, there's a limitation of
10% of
the amount of foreign taxes available.
So, similar to the 10% haircuton the deemed paid credit, there's now
a 10% haircut on withholding taxes
(19:24):
for NCTI PTIP.
Mike, I want
to move over to youand talk about the section 250.
Doesn't seem like there's a flashy acronymhere, but what is section 250?
What do we need to be aware of there?
Yeah, I think on the 250, you know, Erickind of mentioned part of it
(19:45):
as it related to the GILTI or NCTIthat there's a 250 deduction
that applies to that type of income.
But in general, high-level,250 was a deduction created
when the TCJA passed to help reducecertain types of income, reduce
the effective tax rate on that incomeby giving special deductions to U.S.
(20:05):
corporations.
So like, as Eric said on the GILTI sidefor that type of income
that got picked up, you got a 250deduction, which kind of brought
the tax rate down,and made income around 10.5%.
The other basket of income, which goes by the acronym of FDII
or in the new worldit's going to be FDDEI.
(20:26):
Because again, the change in that 10%of the fixed assets
that is the income that a U.S.
corporation earns from,you know, what I'll call export
sales, export services, royalties from,you know, foreign persons,
all unrelatedso that, you know, encouraging U.S.
companies to do things in the U.S.
(20:47):
and because it's comingfrom foreign sources
so to speak, you know, foreign payors,then the U.S.
government said, or Congress said, let's,you know, give a 250 deduction for that
income as well.
And that effectivelykind of brought the rate down to 13.125%
(21:07):
under the original law.
So what's kind of happened herethey've made some changes to that, with,
you know, the way they allocate
some expenses and doing the calculation,they did lower the deduction on FDDEI,
they've made some again,some minor adjustments, you know, so
effectively the effective tax ratenow today's around 14%.
(21:29):
So still,
you know, a great benefit for companiesto make sure they're capturing all those,
you know, sales, services, royaltiesinto that calculation.
Again, you know, when you look at yousay, hey, it's a very positive change
when it's in isolation,but because of other changes,
whether, you know, to 174, 163J, bonusdepreciation,
(21:51):
you know, it all comes back to
you need to model to see what kindof impact you really have on that.
And what choices you need to make.
Well, that's a lot.
I thinkwe've covered three of our four buckets.
Last but not least, Mike,we'll stick with you.
How about BEAT?
What's changed?
BEAT, Base Erosion Anti-Avoidance Tax is
(22:12):
probably the one that had the least amountof changes of the three.
Basically,it increased the rate from 10 to 10.5%.
Made it permanent at that 10.5% rate.
And then it took away a provisionthat most people consider harmful here.
In 2026,you were going to lose the ability to use
certain creditslike R&D in your BEAT calculations.
(22:35):
But they took away that exclusion.
So now you're back to still havingfull credits available for that.
So, I mean, the BEAT was in itselfvery, you know,
I would say very helpful changeseven though the rate went up a little bit.
Again, we had similar issues.
Depending on what you do in other codesections, you know,
you may actually put yourselfinto a BEAT situation.
(22:57):
So, you really...
it gets back to what I like to say.
It's modeling.
Cool.
Well, Eric,I know there's...we have now the act,
but is there going to be regs coming outthat need to
iron out some of the gray areas here?
Like dowe think there's going to be more guidance
comingor is kind of what we have what we have?
(23:17):
Oh yeah,I think there needs to be more guidance.
We'll see regulations,I think, at some point.
You know, thinking back,there's still quite
a few questionson several of these provisions.
You know,I think about section 250 deduction
and changes to our expenseallocation and apportionment.
(23:38):
There’s a lot of questions aroundthat that I think will be helpful
with regulations, with clarity,and then going through the process
of feedback and responses from taxpayers
as well.
Great.
Well, Mike,I think to wrap this up, the one word
that I keep hearing from you is modeling,modeling, modeling.
(24:00):
Is that right?
Yeah, it really is. Right.
I mean, you know, there'sso many provisions in this bill,
you know, that were,you know, made from it,
whether it's bonus depreciationor whether it's the R&D expensing.
Again, whether it's 163J limitations,you know?
Those will all impactthe decisions you make.
(24:21):
They will impact all the changes thathave happened in the international space.
Whether it's GILTI,you know, FDII to 250 deduction.
And the only way I think you can make aninformed decision instead of just saying,
hey, I'm going to choose to expense R&Dand make up for everything there.
I think you're going to have to do somemodeling just to see what the impact is.
Again, you could
(24:41):
do something positive on one sideand do something negative on the other
and not having a good answer, that any,and particularly looking forward,
you know, cause maybe some of the changeslike 163J bonus depreciation,
R&D expensing, those are effectivethis year, for your 2025 tax year.
Most of these changes to the internationalprovisions are effective next year.
(25:05):
But decisions you makethis year will impact those next year
as well as your current yearcalculations as well.
So it really is kind of a doublewhammy as it relates to the international.
Great.
Well, thank you both for your time.
I know Devinand I really appreciate you coming and
we'll be looking tohave you back here soon if you'll let us.
(25:27):
Thank you for having us.We look forward to coming back.
Thank you. Thank you both.
Each episode we’ll bring you what we calla Focused FORsight of the week:
an article or recordingthat might be of interest to you.
This week's Focused FORsight is an articlethat expands on our conversation
(25:47):
from today, and it's called “InternationalTax Rebranded:
Key Items in the Reconciliation Bill.”And it can be
found on our WashingtonNational Tax Office website.
Of course, you can always accessour FORsights on the Forvis Mazars U.S.
website more broadly.
And that's our show.
Thanks for joining.
Remember to subscribe and listen in
(26:09):
for the next episode of the podcaston August 19th.
Until next time...
The information set forth in this podcastcontains
the analysis and conclusionsof the panelists based upon his, her,
or their research and analysis of industryinformation and legal authorities.
Such analysis and conclusionsshould not be deemed
(26:30):
opinions or conclusions by Forvis Mazarsor the panelists
as to any individual situationas situations are fact-specific.
The listener should performtheir own analysis
and form their own conclusionsregarding any specific situation.
Further, the panelists’ conclusionsmay be revised without notice,
with or without changes in industryinformation and legal authorities.
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