Tax Update for International Corporations: TCJA & Potential Changes

There is ongoing discussion in Congress and the media about the possibility of extending the Tax Cuts and Jobs Act (TCJA) provisions. This blog will outline the two key areas of the TCJA and the implications if they are not extended. There is ongoing discussion in Congress and the media about the possibility of extending the provisions of the Tax Cuts and Jobs Act (TCJA). This blog will outline the two key areas of the TCJA and the implications if they are not extended.

For decades, the United States operated under a worldwide tax system, imposing a 35% corporate tax rate on foreign income earned by domestic corporations—one of the highest rates among OECD countries. To reduce their tax liability, many companies chose to defer these taxes and shifted profits to lower-tax jurisdictions.

In response to these issues, the TCJA introduced significant reforms, moving the U.S. tax system towards a more territorial approach. Multinational corporations should adopt both defensive and offensive tax strategies. Defensively, they should focus on maximizing benefits from mechanisms that minimize double taxation, such as the foreign tax credit (FTC). Offensively, they need to adapt to new tax structures, including the Global Intangible Low-Taxed Income (GILTI) rules.

When U.S. businesses or corporations engage in foreign operations—either directly or through U.S.-owned entities—they may be subject to foreign income taxes, which creates a risk of double taxation. The primary mechanism to alleviate this is the FTC, which provides a dollar-for-dollar reduction in U.S. tax liability for income taxes paid to foreign governments up to the amount of U.S. tax owed.

The TCJA introduced several significant changes to the FTC, including:

• Repealing the fair market value method for asset valuation in interest expense allocation under §864(e)(2).
• Adding §904(b)(4), which establishes rules for handling §245A dividends.
• Introducing two new foreign tax credit limitation categories under §904(d)(1).
• Substantially revising the deemed-paid FTC under §960.
• Repealing the indirect FTC under §902, which previously allowed domestic corporations with at least 10% ownership in certain foreign entities to claim an indirect FTC.

Under the TCJA, a U.S. shareholder of any controlled foreign corporation (CFC) must include their share of GILTI in income (similar to subpart F inclusions) for the taxable year. GILTI typically impacts foreign operations with significant intangible assets or those operating in low-tax jurisdictions. However, because GILTI is calculated based on a percentage of the basis of certain tangible assets, even earnings from higher-than-routine returns on tangible assets may be subject to taxation under this regime.

GILTI is calculated at the U.S. shareholder level. Under the current TCJA provisions, a domestic corporation (or an individual U.S. shareholder electing to be taxed as a corporation under §962) qualifies for a 50% deduction of the 21% corporate tax rate on GILTI inclusions, resulting in an effective tax rate of 10.5%. However, unless Congress extends the TCJA provisions, this deduction will decrease from 50% to 37.5% in 2026, raising the effective GILTI tax rate to 13.125%.  Additionally, taxpayers may claim an FTC for up to 80% of foreign taxes paid on GILTI inclusions. However, these FTCs cannot be carried back or forward, limiting their flexibility in offsetting tax liabilities.

We will provide updates as more details emerge during congressional discussions. Please contact McGuire Sponsel’s Global Business Services team for additional information or if you have any questions.