The international tax provisions of the One Big Beautiful Bill Act of 2025 (OBBBA) may appear modest: new acronyms, revised definitions of taxable income, and incremental rate changes. But the policy shift is bigger than it seems. OBBBA replaces two key Tax Cuts and Jobs Act (TCJA) provisions, GILTI (Global Intangible Low-Taxed Income), and FDII (Foreign-Derived Intangible Income), with new rules meant to tilt incentives toward domestic investment and away from certain lightly taxed foreign investment.
A shift to worldwide taxation with export subsidies
In 2017, the TCJA moved the US toward a territorial tax system, paired with a worldwide minimum tax (GILTI) aimed at low-taxed foreign intangible income. It also created FDII, which provides a lower effective tax rate intended to reward export-related income tied to intangible assets such as intellectual property held in the US. The focus on intangible income reflected a sensible diagnosis: Intangible profits are easier to shift to tax havens than profits tied to machines, factories, and other tangible assets.
OBBBA takes a different approach. It eliminates the deduction for tangible assets in calculating both foreign taxable income and export-derived domestic income. It replaces GILTI with Net Controlled Foreign Corporation Tested Income (NCTI) and replaces FDII with Foreign-Derived Deduction Eligible Income (FDDEI). The result looks more like a worldwide tax system, but with preferential rates for certain foreign income and export-related income.
By many accounts, profit-shifting by US multinationals has not substantially declined since 2017, in part because TCJA’s incentives were not strong enough to change corporate structures. OBBBA does little to change that. It shifts investment incentives at the margin, but it steps back from the TCJA’s territorial direction, pairing worldwide logic with a generous export policy.
OBBBA repeals some of TCJA’s unwanted incentives
Under the TCJA, GILTI’s intent was to target intangible income. As a result, it excluded a share of foreign tangible assets from the tax base, effectively subsidizing certain foreign investments. For example, if a US company built a new factory abroad, it could deduct part of that investment when calculating its US tax liability, potentially reducing or eliminating its GILTI tax liability. In some cases, this produced negative marginal effective tax rates (EMTRs), subsidizing marginal foreign investment.
Whether this was desirable depended on economic relationships. If foreign and domestic production are complements, foreign investment can raise domestic investment and employment. Some research suggests GILTI increased domestic investment on average. Still, GILTI remained controversial precisely because it substantially lowered marginal tax rates on some foreign tangible investments.
Under the TCJA’s FDII, additional domestic tangible investment could reduce how much a company’s income benefited from the preferential rate, raising the tax cost of some marginal domestic investments. OBBBA eliminates the tangible asset deduction in both GILTI and FDII, removing these incentives.
Domestic versus foreign investment: A shift in tax burdens
OBBBA also restores permanent full expensing for equipment and research and development (R&D) and adds new expensing for some manufacturing structures. Full expensing makes the corporate tax largely neutral for firms’ decisions to undertake new, break-even investments. While taxes on investors still affect after-tax returns, their impact on investment incentives is much smaller. In that sense, the law lowers the tax burden on many new domestic investments.
With full expensing as the new baseline, FDDEI mainly affects marginal investments that still cannot be fully expensed, such as some structures that support export activity (like office buildings). Its bigger effect is on profitable export activity that firms would undertake anyway. By applying a preferential rate to certain export-related income, FDDEI reduces the average effective tax rate on those profitable investments by roughly 2 percentage points.
On the foreign side, the effects of NCTI depend heavily on a firm’s tax planning. Consider two stylized companies, Firm A and Firm B.
Firm A shifts little income and already pays enough foreign tax that it rarely owes additional US tax. For Firm A, more generous foreign tax credits largely offset NCTI’s slightly higher rate and broader base.
Firm B, by contrast, reports a large share of its income in low-tax jurisdictions and routinely owes additional US tax. For Firm B, NCTI can sharply raise taxes on new foreign tangible investment: Projects that were previously lightly taxed or even subsidized can face effective marginal tax rate increases of roughly 15 to more than 30 percentage points. Its effective average tax rates on profitable foreign projects rise more modestly, typically by 1 to 3 percentage points.
OBBBA leaves several key issues unresolved
OBBBA shifts incentives toward domestic investment, but it leaves three big problems largely untouched. First, it is unlikely to significantly curb profit-shifting. NCTI still allows “global pooling,” meaning firms can combine income and foreign taxes across affiliates in both high- and low-tax countries. That can soften the minimum tax’s deterrent effect on booking profits in low-tax jurisdictions.
Second, US multinationals recently were exempted from the global minimum tax, but the law does not meaningfully simplify international taxation. Instead, companies must layer the new NCTI and FDDEI rules on top of an already crowded landscape: the corporate alternative minimum tax, various foreign digital service taxes, and a still‑functioning Base Erosion and Anti‑Abuse Tax (BEAT).
Third, the international provisions reduce federal revenue by an estimated $170 billion over ten years. Congress chose not to eliminate the tangible asset deductions in a revenue-neutral way.
Aggressive profit shifting may raise after-tax returns for some firms, but it also erodes public trust in the tax system. Straightforward options like a country-by-country minimum tax or a mandatory high-tax exclusion would better target the most aggressive strategies.
Assuming lawmakers want to maintain this shift toward favoring domestic investment, future reform could build on OBBBA by simplifying the system, curbing profit-shifting more directly, and raising revenue while preserving strong incentives for US investment and growth.