The Senate bill passed on July 1 revisits key international provisions of the 2017 Tax Cuts and Jobs Act (TCJA) by taxing foreign profits and rewarding exports in new ways starting in 2026. Overall, its international provisions would reduce revenues by roughly $170 billion over 10 years relative to current law, about the same as the House reconciliation bill which largely maintained the current policy.
The Senate reforms, outlined below, align with the administration’s goal of favoring domestic over foreign investment, but they are modest and would be unlikely to yield major changes.
Broadening the focus from intangible income
The TCJA fundamentally changed the taxation of US multinationals with three major provisions that address how companies earn and report income abroad.
- Global Intangible Low-Taxed Income (GILTI) is a minimum tax on foreign earnings above a normal return on tangible investments.
- Foreign-Derived Intangible Income (FDII) is a deduction for certain export-related domestic income tied to intellectual property, like software or patents.
- Base Erosion and Anti-Abuse Tax (BEAT) is a tax targeting US corporations making deductible payments (like royalties or interest) to foreign subsidiaries.
US multinationals often hold intangible assets—like patents and trademarks—in low-tax jurisdictions to avoid US taxes. While the share of US profits reported abroad declined after 2017, GILTI and FDII did not significantly curb overall profit shifting. US multinationals still reported 30 to 50 percent of their income in tax havens in 2020, similar to pre-2018 levels.
A revised GILTI would expand to cover all foreign profits
Instead of targeting only foreign intangible income—calculated as foreign income in excess of a 10 percent return on tangible assets—the Senate bill would tax all net income of foreign subsidiaries at 12.6 percent, up from the current 10.5 percent, but lower than the 13.125 percent scheduled to take effect in 2026 under current law.
However, companies would be able to claim more generous foreign tax credits to offset those taxes. This eliminates GILTI’s incentives for multinational to locate more tangible assets abroad, including production facilities.
A revised FDII would expand incentives for exports
The TCJA’s FDII deduction aimed to encourage US companies to bring intellectual property back to the US by lowering the taxes on export-derived intangible income. The Senate bill would replace FDII with a new deduction called Foreign-Derived Deduction Eligible Income (FDDEI).
Unlike the FDII, which excluded normal returns on tangible assets, the FDDEI would apply to nearly all export income (although there would be exceptions for sales of intangible assets and passive income). This removes the TCJA’s incentive to reduce domestic investment in tangible assets and transforms the deduction into a traditional export subsidy.
The Senate bill sets a preferential rate of 14 percent—higher than the current 13.125 percent but lower than the scheduled 16.406 percent on FDII income under current law.
The BEAT would largely stay the same
The first draft released by the Senate Finance Committee included some key reforms to the BEAT by lowering the threshold for deductible payments that trigger the tax, raising the BEAT rate to 14 percent in 2026—higher than the current 10 percent and the scheduled 12.5 percent—and exempting payments made to affiliates in foreign countries that tax corporate income at a rate higher than 18.9 percent.
Ultimately, Senate Republicans abandoned the reform, instead keeping the current structure of the BEAT and setting a new permanent rate of 10.5 percent. This would cost roughly $30 billion over ten years.
How the Senate plan aligns with OECD’s Pillar 2
A key feature of the Organisation for Economic Co-operation and Development (OECD) tax framework is a global minimum corporate tax of 15 percent, or “Pillar 2,” to be paid by large multinationals in every country where they operate. The Senate’s new higher minimum foreign tax is more stringent than Pillar 2 rules in some cases, and it may exempt some US companies from additional Pillar 2 liability.
But important differences remain, particularly that the US approach blends foreign income, while Pillar 2 applies a country-by-country calculation.
The Senate initially included a retaliatory tax, referred to as Section 899 and introduced by the House. It targetedforeign countries that have adopted an undertaxed payments rule (UTPR), a key enforcement provision of the OECD global minimum tax. In response, countries that had signed on to the deal could seek a compromise, excluding US multinationals from the UTPR by recognizing the new foreign minimum tax as a qualifying income inclusion rule.
That strategy showed signs of success: last week Treasury Secretary Scott Bessent asked Congressional Republicans to drop the retaliatory tax from the final bill after G7 countries agreed to exempt US multinationals from the “discriminatory” taxes in the global minimum tax agreement. Congressional Republicans agreed but noted they were ready to bring the “revenge” tax back if implementation of the deal with OECD countries fails.
The Senate bill is cohesive and moves toward favoring domestic over foreign investment
The Senate’s strategy moves the US closer to some of Pillar 2’s principles but misses key elements and is unlikely to change profit-shifting incentives. The new FDDEI avoids some of the pitfalls of the FDII, and, as a more traditional export subsidy, supports the administration’s goals of boosting US exports.
Ultimately, the Senate bill marks a shift in US international tax policy approach but a modest one and its costs are largely the same as maintaining the current regime.
