International Tax Reform: Key Takeaways in the Senate’s “One Big Beautiful Bill”

Disclaimer: The content in this blog was written prior to the passage of the “One Big Beautiful Bill” and may not reflect the most current tax laws or regulatory updates. For the latest guidance and implications of the new legislation, please consult with your McGuire Sponsel advisor or refer to our updated resources.

The Senate Finance Committee released its version of tax reconciliation legislation on June 16, 2025. The Senate version of the “One Big Beautiful Bill” proposes several notable changes to U.S. international tax rules. This bill focuses heavily on making Tax Cuts and Jobs Act (TCJA) provisions permanent while introducing new international tax measures. It refines key provisions like Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII), introduces retaliatory measures under Section 899, and responds to global minimum tax developments under the OECD’s Pillar Two.

GILTI Rebranded as NCTI

One of the most significant changes is the renaming of GILTI to National Corporate Tax Income (NCTI). This rebranding signals a substantive restructuring designed to better align with global norms while maintaining U.S. competitiveness:

• The §250 deduction is reduced from 50% in 2025 to 40% from 2026 onward, increasing the effective U.S. tax rate on NCTI from 10.5% to 12.6%.
• The foreign tax credit (FTC) haircut is reduced from 20% to 10%, providing modest relief for taxpayers with significant foreign tax burdens. This could increase the effective tax rate from the abovementioned 12.6% to 14%.
• The bill eliminates the Qualified Business Asset Investment (QBAI) exemption, which removes the 10% deemed return on tangible assets and potentially subjects more foreign income to U.S. taxation.
• Expense allocation rules are revised to limit the punitive effect on foreign-source income, addressing a longstanding compliance burden.

These changes move the U.S. closer to OECD Pillar Two standards while preserving key revenue-raising features that have become integral to federal tax collections since 2018.

FDII Becomes FDDEI

The FDII deduction undergoes both rebranding and substantive modification, becoming Foreign-Derived Domestic Export Income (FDDEI):

• The deduction drops from 37.5% in 2025 to 33.34% in 2026, resulting in an effective tax rate of 14% on qualifying export income, compared to 13.125% in 2025 and 16.406% if TCJA provisions expire.

This adjustment is intended to retain meaningful export incentives without over-emphasizing the “intangible” nature of the income, reflecting ongoing debates about the appropriate scope of IP-based tax benefits.

Section 899: Retaliatory Tax Measures

Perhaps the most controversial provision is Section 899, which represents the U.S. response to perceived discriminatory foreign tax regimes. The provision includes digital services taxes and the OECD’s Undertaxed Profits Rule. The Senate version preserves a modified approach to these provisions:

• The maximum penalty tax rate is reduced from 20% to 15% compared to the House version, suggesting some recognition of the potential for escalatory tax disputes.
• These provisions apply to foreign persons and U.S. corporations majority-owned by residents of listed countries starting in 2027, providing a transition period for potential diplomatic resolution.
• The measures include increased withholding rates, denial of certain treaty benefits, and implementation of a “Super BEAT” for inbound structures tied to discriminatory countries. Exemptions for portfolio interest and bank deposit interest are preserved.
• Withholding agents must monitor the Treasury’s list of offending countries to ensure compliance.

This provision has already generated significant market concern. Some reports have indicated potential impacts on foreign investment in U.S. Treasury securities, highlighting the delicate balance between tax policy and international economic relations.

BEAT Adjustments and Super BEAT

The Base Erosion and Anti-Abuse Tax (BEAT) receives both permanence and enhancement under the Senate proposal:

• The standard BEAT rate increases slightly to 10.1% (up from 10%) and becomes a permanent feature of the tax code.
• The newly introduced Super BEAT targets entities connected to countries with “unfair foreign taxes,” featuring more aggressive thresholds:
  • Gross receipts threshold reduced to $0.5 million (from $500 million)
  • Base erosion percentage lowered to 0.5% (from 3%)

These changes significantly expand BEAT’s reach and represent a substantial compliance burden for affected taxpayers.

Favorable Sourcing Rule for Inventory

In a pro-export measure, the bill introduces a new sourcing benefit beginning in 2026:

• Up to 50% of taxable income from U.S.-produced inventory sold through a foreign office may be treated as foreign-source income.
• This provision reduces U.S. tax exposure on export sales and provides meaningful relief for manufacturing exporters operating through foreign sales offices.

Permanence of Key TCJA Provisions

The Senate bill extends beyond international tax changes, making permanent several expiring TCJA provisions that affect international businesses:

• The Section 199A pass-through deduction remains at 20% of qualified business income, providing continued benefits for domestic partnerships and S corporations with international operations.
• Various business tax provisions receive permanent status, offering long-term planning certainty that has been absent since the original TCJA sunset provisions.

Legislative Outlook and Timing

The Senate Finance Committee’s release represents a critical milestone in the 2025 tax legislative process. With the bill’s comprehensive approach to both domestic and international tax issues, practitioners should expect:

• Continued refinement of technical provisions as the bill moves through committee markup.
• Potential modifications to Section 899 provisions in response to diplomatic and market pressures.
• Close coordination with the Treasury and IRS on implementation timelines, particularly for the complex NCTI transition.

Strategic Implications for Practitioners

The Senate draft signals several significant trends for international tax planning:

1. Increased complexity in transfer pricing and intercompany arrangements due to QBAI elimination and revised expense allocation rules.
2. Enhanced due diligence requirements for clients with operations in countries potentially subject to Section 899 measures.
3. Renewed focus on export structures given the favorable inventory sourcing rules and modified FDDEI benefits.
4. Compliance system updates are needed to address expanded BEAT applications and Super BEAT requirements.

Conclusion

The Senate draft reflects a strategic recalibration of U.S. international tax policy that balances multiple competing objectives:

1. Maintaining revenue collections
2. Responding to perceived foreign tax discrimination
3. Preserving American competitiveness in the global economy

While it avoids more radical restructuring options—such as adopting a country-by-country GILTI regime or fundamentally reorganizing foreign tax credit baskets—it signals a continued evolution toward coordinated global tax compliance with distinctly American characteristics.

The bill’s approach to international tax coordination demonstrates both pragmatic acceptance of OECD frameworks and assertive protection of U.S. tax sovereignty. For international tax practitioners, these changes represent both opportunities for client value creation and significant compliance challenges that will require careful attention to implementation details and transition rules.

As the legislative process continues, practitioners should:

• Monitor developments closely, particularly regarding Section 899 implementation and the technical aspects of the NCTI transition, which will likely require substantial regulatory guidance to ensure effective compliance.
• Educate clients on tax liability increases under NCTI and FDDEI.
• Perform impact assessments for any clients relying on QBAI, FDII, or BEAT exemptions.

If you have clients with global operations, now is the time to proactively plan. Our Global Business Services team can help navigate these upcoming changes and minimize exposure. McGuire Sponsel is continuing to monitor major tax legislation and continues to provide updates on the One Big Beautiful Bill as they unfold.