International Tax: GILTI, FDII & Foreign Tax Credits

The 2017 Tax Cuts and Jobs Act fundamentally restructured how the U.S. taxes American companies' foreign earnings — moving from a "worldwide" tax system (tax all income wherever earned) to a quasi-"territorial" system (exempt most foreign earnings from current U.S. tax) with new anti-abuse guardrails. The most significant new provisions: GILTI (Global Intangible Low-Taxed Income) — a minimum tax on U.S. corporations' foreign subsidiaries earning above a 10% return on tangible assets, taxed at an effective rate of approximately 12.6% (21% corporate rate with a 40% deduction, with partial foreign tax credit); FDII (Foreign-Derived Intangible Income) — a lower 14% effective tax rate on profits from exports and foreign sales, designed to reward domestic manufacturing over offshoring; and the BEAT (Base Erosion and Anti-Abuse Tax), a minimum 10% tax on large corporations that strip income through deductible payments to foreign affiliates. Foreign tax credits generally prevent true double taxation, but the basket rules and GILTI-specific credit limitations create complex interactions that require careful planning. The TCJA's international provisions were calibrated for specific OECD BEPS Base Rate scenarios; the global minimum tax framework (Pillar Two, 15% global minimum) is reshaping the landscape further, with major U.S. trading partners implementing it while the U.S. has not yet enacted domestic legislation.

Current Law (2026)

Parameter	Value
Core statutes	IRC Subchapter N (§§ 861-898 — income sourcing; §§ 901-909 — foreign tax credit; §§ 951-965 — controlled foreign corporations; § 250 — GILTI/FDII deductions)
GILTI rate	Effective 2026 baseline is generally 12.6% before foreign tax credit effects (21% corporate rate with a 40% § 250 deduction; 80% FTC rules still apply)
FDII rate	Effective 2026 baseline is generally about 14.0% (21% corporate rate with a 33.34% § 250 deduction)
Foreign Tax Credit	Dollar-for-dollar credit against U.S. tax on foreign-source income; limited to U.S. tax attributable to foreign-source income; separate baskets for general, passive, GILTI
CFC regime	U.S. shareholders (≥10% vote/value) of controlled foreign corporations (>50% U.S.-owned) subject to current taxation on Subpart F income and GILTI
PFIC regime	U.S. shareholders of passive foreign investment companies (≥75% passive income or ≥50% passive assets) subject to punitive tax on gains and excess distributions
BEAT	Base Erosion and Anti-Abuse Tax: minimum 10% tax on modified taxable income for large corporations making deductible payments to foreign affiliates

Legal Authority

26 U.S.C. §§ 861-865 — Source of income rules (determines whether income is U.S.-source or foreign-source; critical for foreign tax credit limitation and treaty application)
26 U.S.C. §§ 901-909 — Foreign tax credit (credit for income, war profits, and excess profits taxes paid or accrued to foreign countries; limitation to U.S. tax on foreign-source income; separate limitation categories; carryforward/carryback)
26 U.S.C. §§ 951-965 — Controlled foreign corporations (CFC definition; Subpart F income — passive income, related-party sales, services; GILTI — global intangible low-taxed income; § 965 — transition tax on accumulated foreign earnings)
26 U.S.C. § 250 — GILTI and FDII deductions (for 2026, the deduction percentages are lower than they were before 2026, increasing the effective tax rate on both items)
26 U.S.C. § 245A — Dividends received deduction for foreign-source dividends (participation exemption — 100% deduction for dividends from 10%-owned foreign corporations, moving U.S. toward territorial system)
26 U.S.C. §§ 1291-1298 — Passive foreign investment companies (excess distribution regime; QEF and mark-to-market elections; punitive tax on deferred gains)
26 U.S.C. § 59A — Base Erosion and Anti-Abuse Tax (BEAT) (minimum tax on large corporations making deductible payments to foreign affiliates; applies to corporations with $500M+ gross receipts and base erosion percentage ≥3%)

How It Works

International tax law is among the most complex areas of the U.S. tax code. It determines how the United States taxes income earned abroad by U.S. persons and income earned domestically by foreign persons. The Tax Cuts and Jobs Act of 2017 — the same law that reshaped the Alternative Minimum Tax — fundamentally restructured the U.S. international tax system, moving from a worldwide taxation model toward a modified territorial system — but with significant anti-abuse provisions.

Before 2018, the U.S. taxed corporations on worldwide income but allowed deferral — foreign subsidiary earnings could remain untaxed until repatriated as dividends, producing an estimated $2.6 trillion in accumulated untaxed offshore corporate earnings by 2017. The Subpart F rules taxed some "tainted" income currently (passive income, related-party sales), but active business income could be deferred indefinitely. The Tax Cuts and Jobs Act (TCJA) restructured this with three changes: the participation exemption (§ 245A) makes dividends from 10%-owned foreign corporations 100% deductible for U.S. corporate parents, moving the U.S. toward a territorial system for repatriated active earnings; GILTI (§ 951A) — renamed Net CFC Tested Income (NCTI) by the 2025 OBBBA — imposes a current minimum tax on the excess of a controlled foreign corporation's income over a 10% return on its tangible assets; after the OBBBA-permanent 40% § 250 deduction, the 2026 effective rate is approximately 12.6% before foreign tax credit effects (replacing the prior 50% deduction / ~10.5% rate); and the transition tax (§ 965) imposed a one-time levy on accumulated untaxed CFC earnings (15.5% on cash, 8% on illiquid assets), payable over 8 years.

As a domestic counterpart to GILTI, the Foreign-Derived Intangible Income (FDII) deduction under § 250 — renamed Foreign-Derived Deduction Eligible Income (FDDEI) by the 2025 OBBBA — provides a 2026 effective tax rate of approximately 14.0% on income from goods and services sold to foreign customers that is attributable to intangible assets (33.34% deduction, made permanent by OBBBA; replaced the prior 37.5% deduction / ~13.125% rate) — incentivizing U.S. corporations to keep IP and economic activity domestic rather than shifting it to low-tax jurisdictions. The Foreign Tax Credit (FTC) under § 901 has been the cornerstone of international tax for decades: U.S. persons who pay income tax to foreign countries can credit it against their U.S. liability to prevent double taxation, subject to a limitation to the U.S. tax attributable to foreign-source income and calculated in separate "baskets" (general, passive, GILTI, and others) to prevent cross-crediting; excess credits carry forward 10 years and back 1 year. U.S. investors in passive foreign investment companies (PFICs) — foreign corporations with ≥75% passive income or ≥50% passive assets — face a punitive default regime that taxes gains and excess distributions at the highest rate plus an interest charge allocated over the holding period; the QEF and mark-to-market elections offer less punitive treatment in exchange for annual income inclusions.

How It Affects You

If you're a U.S. multinational corporation: GILTI/NCTI, FDII/FDDEI, BEAT, and the participation exemption are the four pillars of your post-TCJA international tax strategy — and they interact in ways that can dramatically affect your effective tax rate. For 2026, the OBBBA permanently set the § 250 GILTI deduction at 40%, producing an effective GILTI rate of approximately 12.6% before foreign tax credits; the 80% FTC limitation now means you need foreign tax rates above roughly 15.75% to fully offset GILTI. Jurisdictions like Ireland (12.5%) are below the credit crossover; Cayman subsidiaries (0%) generate raw GILTI exposure with no FTC offset. FDII — the export income incentive — provides an effective 14.0% rate (33.34% § 250 deduction, made permanent by OBBBA) for income from goods and services sold to foreign customers attributable to intangible assets. BEAT applies if you have $500M+ average gross receipts and a base erosion percentage ≥3% — and eliminates credits (except R&D credits) that would otherwise offset the BEAT minimum. The 2026 Pillar Two framework (most major trading partners implementing 15% global minimum) means foreign subsidiaries in low-tax jurisdictions may face top-up taxes from those countries even if the U.S. doesn't change GILTI — a structural shift that warrants remodeling your tax planning assumptions.

If you're a U.S. citizen living abroad (expat): You are subject to U.S. worldwide taxation no matter where you live — the U.S. and Eritrea are the only countries that tax by citizenship rather than residency. The Foreign Earned Income Exclusion (FEIE) lets you exclude up to $132,900 (2026; indexed annually) of foreign wages and self-employment income from U.S. tax. The Foreign Housing Exclusion adds additional relief for above-average housing costs in expensive cities. But FEIE doesn't help with passive income (dividends, interest, capital gains), which is only protected by the foreign tax credit. Critical compliance obligations: FBAR (FinCEN Form 114) if foreign accounts exceed $10,000 at any point during the year; Form 8938 (FATCA) if foreign financial assets exceed $50,000 ($75,000 for married filing jointly) at year end or $100,000/$150,000 at any point. Penalties for missing FBARs can exceed $10,000 per violation per year. If you've been living abroad and not filing U.S. returns, the IRS Streamlined Filing Compliance Procedures (for non-willful failure) allow catch-up filing with a 5% offshore penalty instead of the standard 20%+ penalties — but requires acting before the IRS contacts you.

If you invest in foreign mutual funds, ETFs, or other offshore funds: You may own a Passive Foreign Investment Company (PFIC) without knowing it. Any foreign corporation with ≥75% passive income or ≥50% passive assets — which includes most foreign-domiciled mutual funds and ETFs — is a PFIC. Under the default excess distribution regime, gains and excess distributions are allocated back over your entire holding period and taxed at the highest statutory rate (37% individual, 21% corporate) plus interest charges — eliminating all deferral benefit and often creating an effective tax rate exceeding 50% on long-term holdings. The two alternatives: a QEF election (include your share of the fund's earnings annually; preserves capital gains rates but requires annual income whether or not distributed) or a mark-to-market election (include unrealized gains annually as ordinary income). Both require timely annual elections and specific form filings (Form 8621). The practical consequence: most U.S. taxpayers should hold diversified international exposure through U.S.-domiciled funds (ETFs listed on U.S. exchanges) rather than foreign-domiciled funds, even if fees are slightly higher.

If you're a C corporation with significant foreign sales: FDII provides a meaningful rate reduction — from 21% to approximately 13.125% effective — on income from goods and services sold to non-U.S. customers that is attributable to intangible assets. The mechanics require calculating your "deemed intangible income" (your total net income minus a 10% return on qualified business asset investment) and determining what portion is "foreign-derived." The calculation isn't trivial for smaller companies, but for any manufacturer or software company with substantial export revenue, the benefit can justify the work. FDII and GILTI deductions both come through § 250, and they're calculated on the same return — if you have GILTI from foreign subsidiaries, your FDII deduction is carved out of the same § 250 deduction limit. Consult Form 8993 (FDII computation) and Treasury regulations § 1.250(b)-1 through -6 for the technical details.

State Variations

Most states conform to the federal international tax provisions, but with significant variations
Some states do not allow the § 250 GILTI/FDII deduction, effectively taxing GILTI at the full state corporate rate
State conformity to the participation exemption (§ 245A) varies — some states tax repatriated foreign dividends that are exempt federally
Transfer pricing rules are primarily federal, but states may challenge intercompany pricing that affects state-source income

Implementing Regulations

26 CFR Part 1 — Income tax regulations (§§ 1.951A-1 through 1.951A-7 — GILTI computation, tested income, tested loss, CFC pro rata share, QBAI, net deemed tangible income return; §§ 1.250-1 through 1.250(b)-6 — FDII and GILTI deduction, foreign-derived deduction eligible income, deemed intangible income)
26 CFR 1.250(a)-1 — FDII deduction (under the 2025 OBBBA, the § 250 deduction for foreign-derived intangible income is permanently set at 33.34%, producing an effective ~14.0% rate for tax years beginning after Dec. 31, 2025)
26 CFR 1.951A-5 — GILTI inclusion amounts treatment (Treatment of CFC tested income, qualified business asset investment computation, basis adjustments)
26 CFR 1.6038-5 — Information returns for GILTI reporting (Form 8992 for U.S. shareholders of CFCs subject to GILTI)

Pending Legislation

S 1605 (Sen. Tillis, R-NC) — International Competition for American Jobs Act: would overhaul GILTI, FDII, Subpart F, foreign tax credits, and BEAT provisions to improve U.S. competitiveness. Status: Introduced.
HR 1911 (Rep. Steube, R-FL) — Would establish a 15% effective foreign tax safe harbor for related-party payments, simplifying compliance for multinationals with operations in higher-tax jurisdictions. Status: Introduced.
S 1325 (Sen. Whitehouse, D-RI) — Foreign Pollution Fee Act: would impose a pollution-based fee on imports from countries with weaker environmental standards, using the international tax framework to address carbon leakage. Status: Introduced.

Recent Developments

The 2026 Section 250 deduction percentages are less generous than the pre-2026 percentages, increasing the effective tax rate on both GILTI and FDII under current law
OECD Pillar Two global minimum tax (15%) creates pressure on U.S. international tax rules — potential for GILTI reform to align with global standards
Treasury has issued extensive regulations on GILTI, FDII, and BEAT that significantly affect their application
Transfer pricing enforcement has intensified as IRS focuses on multinational profit shifting, with the International Trade Commission addressing related trade-side issues
Feb 2026: Senate Finance Chair Crapo and House Ways & Means Chair Smith issue a joint statement celebrating a milestone in international tax policy aimed at protecting American workers and businesses from foreign tax regimes, and commit to retaliatory action against countries that impose discriminatory tax treatment on U.S. companies.