Key Points
We estimate that foreign-derived intangible income (FDII) has grown almost twice as fast over time as global intangible low-taxed income (GILTI) since their inception in the 2017 Tax Cuts and Jobs Act. The value of the Section 250 deduction, which determines the effective tax rate on these income categories, reached $517 billion in 2022.
We estimate that OBBBA’s reforms to the Section 250 deduction will reduce corporate tax revenue by $276 billion between 2026 and 2035 on a conventional basis, assuming that the other OBBBA provisions are current law. About half of the revenue loss is attributable to rate changes to the FDII deduction with the other half mainly caused by rate changes to the GILTI deduction and the GILTI foreign tax credit. This reduction is larger than the $118 billion value estimated by the Joint Committee on Taxation (JCT) for the same provisions.
OBBBA International Tax Reforms: Updated Cost Estimates
On July 4, 2025, President Trump signed into law the FY 2025 reconciliation bill (OBBBA). This brief examines the bill’s reforms to the taxation of U.S. multinational corporations’ foreign income, focusing on changes to the rules governing taxation of foreign income previously known as Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII). OBBBA eliminated these concepts from the tax code and replaced them with two analogous provisions: Net CFC Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI).1 Together, these provisions determine a combined tax incentive available to corporations in the U.S. tax code known as the Section 250 deduction.
In 2017, the Tax Cuts and Jobs Act (TCJA) introduced a new system governing the taxation of foreign income of U.S. multinational corporations. Although TCJA left in place some aspects of the prior international tax system, most foreign income earned by U.S. multinational corporations became subject to tax under two newly created income categories: GILTI and FDII.2
GILTI and FDII correspond to two different ways that U.S. multinationals can earn foreign income. They can earn income indirectly through foreign affiliates, i.e. “controlled foreign corporations” (CFCs) that issue dividends to their U.S. parent. Alternatively, the U.S. parent can earn foreign income directly by exporting goods and services to foreign persons.
Historically, U.S. multinationals were able to lower their effective tax rate on foreign income by choosing the first approach, setting up CFCs in low-tax jurisdictions and deferring repatriation of their foreign earnings to the U.S. parent along with any corresponding U.S. corporate income tax. Under the GILTI regime, such earnings became subject to tax whether or not they were repatriated at a rate below the U.S. statutory corporate tax rate. Between 2018 and 2025, the GILTI regime allowed for a 50% deduction of foreign income in combination with a credit for up to 80 percent of foreign income taxes paid. In addition, GILTI exempted a portion of foreign income from U.S. taxation with a formula that depended on the book value of CFC tangible assets (qualified business asset investment or QBAI) and a specified return on such assets.3 Prior to the OBBBA reforms, this return was set at 10 percent. The idea behind this exemption was to target income generated by intangible assets, which has historically been easy to shift to tax havens, while maintaining a territorial tax system for tangible income.
Taken together, GILTI’s provisions created a minimum tax targeting foreign intangible income that ranged from 10.5 percent to 13.1 percent between 2018 and 2025, with the U.S. collecting the difference between this minimum rate and the foreign tax paid on income subject to low foreign tax rates. Under the pre-OBBBA tax law, this minimum rate was scheduled to increase to a range of 13.1 percent to 16.4 percent in 2026, after which it would remain constant.4
To tax foreign income directly earned by the U.S. parent, TCJA created an analogous income category called FDII. FDII was designed to be roughly neutral in comparison to the GILTI system. Like GILTI, FDII approximated intangible income using a domestic version of QBAI. In contrast to GILTI, which exempted foreign tangible income from U.S. tax, foreign tangible income under the FDII rules was subject to the U.S. statutory tax rate of 21 percent. The intangible portion of income was subject to a 13.1 percent tax rate, matching the high end of the GILTI minimum tax. Under the pre-OBBBA tax law, this minimum rate was scheduled to increase to 16.4 percent in 2026.
In practice, GILTI and FDII are not taxed as separate income categories but are incorporated into the combined taxable income of the U.S. parent corporation. The reduction in the U.S. statutory rate is implemented indirectly in a corporation’s tax return by allowing for a single deduction, the “Section 250 deduction” reported on Form 1120 Schedule C.5
TCJA introduced the concept of QBAI to separately approximate income generated by tangible and intangible capital. This provision was arguably the most controversial aspect of the law’s international tax reforms. Detractors have argued that GILTI incentivized offshoring of manufacturing activity by exempting income tied to foreign tangible capital investment from U.S. tax. At the same time, under the FDII rules domestic capital investment reduced the amount of income subject to the favorable FDII rate and increased the amount of income subject to the full U.S. statutory tax rate of 21 percent. Proponents of the system suggested that this disparity was not a bug but a feature of TCJA that maintained the ability of U.S. multinational corporations to compete with foreign firms not subject to U.S. tax and emphasized potential benefits to the U.S. economy from foreign investment by U.S. multinationals. Additionally, some have argued that elimination of the QBAI provisions would change the nature of the U.S. international tax system from one that focuses on deterrence of profit-shifting to a system that provides an explicit export subsidy, further undermining the already weakened global trade compact.
OBBBA eliminates the concept of QBAI and the corresponding distinction between tangible and intangible income. The bill’s updated terminology for the two foreign income categories also reflects the fact that they are no longer proxies for intangible income: FDII has been renamed to Foreign-Derived Deduction Eligible Income (FDDEI) and GILTI has been renamed to Net CFC Tested Income (NCTI). FDDEI and NCTI were previously intermediate calculations in the determination of FDII and GILTI. Under the new tax law, they are the final income concepts used to compute the Section 250 deduction.
In addition to eliminating the QBAI exemption, OBBBA also made several other changes to the TCJA’s international tax provisions that are effective beginning in 2026. These include:
Increasing the generosity of the GILTI/NCTI foreign tax credit limitation to 90 percent of foreign taxes from the previously allowed 80 percent.
Setting the GILTI/NCTI deduction rate to create a minimum tax between 12.6 percent and 14 percent, a smaller increase than had been scheduled to take effect in 2026.
Setting the effective tax rate for FDDEI to 14 percent, mitigating the increase to 16.4 percent that had been scheduled to take effect in 2026.
Modifying the allocation rules for determining CFC income, which effectively recategorizes some domestic taxable income as foreign taxable income.
Increasing the base erosion minimum tax from 10 percent to 10.5 percent.
The law also modified several other, more technical aspects of the tax code that are beyond the scope of this brief.6
Comprehensive information about GILTI and FDII is only released with a considerable lag: public data covering the 2022 tax year was made available by the Internal Revenue Service’s Statistics of Income (SOI) program at the end of September 2025. We use this data to provide updated evidence about the historical magnitudes of GILTI, FDII, and related tax concepts.
Figure 1 shows the evolution of GILTI and FDII between 2018 and 2022. Both categories of income rapidly increased since TCJA’s inception. GILTI has grown at an average rate of 18.3 percent per year with FDII growing even faster at a rate of 32.7 percent.
Source: Penn Wharton Budget Model based on IRS Statistics of Income data from Form 1120 Schedule C and Form 1118.
Historically, U.S. multinationals earned a relatively larger share of foreign income through GILTI, although this gap has narrowed in recent years. The picture is reversed, however, when examining U.S. tax liability generated by these income categories. Figure 2 (a) shows the evolution of FDII and GILTI tax liability between 2018 and 2022. The solid bars measure actual tax liability and the empty bars with solid borders measure the tax expenditure, i.e. the liability that would have been generated if income were taxed at the full U.S. statutory rate of 21%. The empty bar with the dashed border measures the foreign tax credit claimed on GILTI income.
An alternative way to view these tax policies is to evaluate them relative to the pre-TCJA tax system. Prior to TCJA, much of the tax liability on foreign affiliate income was deferred indefinitely. Direct income from exports, on the other hand, was subject to the full U.S. statutory tax rate of 21%. Viewed in this way, TCJA’s reforms represented a “carrot and stick” approach, with a tax break on FDII and a tax increase on GILTI. Figure 2 (b) shows this perspective, indicating that the tax liability on GILTI income has recently been overtaken by the tax expenditure from FDII.
Source: Penn Wharton Budget Model based on IRS Statistics of Income data from Form 1120 Schedule C and Form 1118. Notes: Foreign tax credits for 2022 GILTI income are estimated using data from SOI tabulations for Form 1118.
Prior to OBBBA’s enactment, the Section 250 deduction rates had been scheduled to decrease for tax years beginning in 2026, increasing the tax rates on GILTI and FDII. PWBM estimates that allowing these changes to go into effect would have increased corporate tax revenue by $466 billion over 10 years, as shown in Figure 3.
Following OBBBA’s enactment, the tax rates on GILTI and FDII are still scheduled to rise in 2026 but by less than the pre-OBBBA increases, significantly reducing the additional corporate tax revenue generated. On a conventional basis, we estimate that the reforms reduce corporate tax revenue by $276 billion over 10 years. Table 1 in the Appendix provides detailed revenue impacts of the OBBBA reforms.
| Year | Maintain Pre-OBBBA Tax Law | Implement OBBBA Reforms |
|---|---|---|
| 2026 | 28.7 | -16.5 |
| 2027 | 39.8 | -22.8 |
| 2028 | 42.1 | -24.1 |
| 2029 | 44.4 | -26.1 |
| 2030 | 46.4 | -28.0 |
| 2031 | 48.4 | -29.3 |
| 2032 | 50.7 | -30.6 |
| 2033 | 52.9 | -31.8 |
| 2034 | 55.2 | -33.0 |
| 2035 | 57.5 | -34.2 |
| All Years | 466.2 | -276.4 |
Source: Penn Wharton Budget Model.
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These include a permanent extension of the “look-through” rule, a modification of constructive ownership rules, and a modification to the pro rata share rules for determining CFC income. OBBBA also removed some discretion for the determination of foreign corporations’ tax years and introduced a new tax break for foreign branch income. ↩
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Another component of the tax system that determines U.S. tax on a small portion of foreign income, known as Subpart F, remained in place following the TCJA reforms. ↩
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The specified return is known as the “Deemed Tangible Income Return” (DTIR). ↩
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The GILTI minimum rate is given as a range because of the way that the foreign tax credit interacts with U.S. tax liability. ↩
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This deduction is computed on Form 8993. ↩
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These include a permanent extension of the “look-through” rule, a modification of constructive ownership rules, and a modification to the pro rata share rules for determining CFC income. OBBBA also removed some discretion for the determination of foreign corporations’ tax years and introduced a new tax break for foreign branch income. ↩
Year Variable Value 2018 Global Intangible Low-Taxed Income (GILTI) 342.303803 2018 Foreign-Derived Intangible Income (FDII) 121.258264 2019 Global Intangible Low-Taxed Income (GILTI) 495.466021 2019 Foreign-Derived Intangible Income (FDII) 151.1527453 2020 Global Intangible Low-Taxed Income (GILTI) 437.629827 2020 Foreign-Derived Intangible Income (FDII) 174.530216 2021 Global Intangible Low-Taxed Income (GILTI) 607.657917 2021 Foreign-Derived Intangible Income (FDII) 284.764448 2022 Global Intangible Low-Taxed Income (GILTI) 670.540363 2022 Foreign-Derived Intangible Income (FDII) 375.6624133
Year name value category 2018 FDII Liability (actual) 15.91514715 FDII 2019 FDII Liability (actual) 19.83879783 FDII 2020 FDII Liability (actual) 22.90709085 FDII 2021 FDII Liability (actual) 37.3753338 FDII 2022 FDII Liability (actual) 49.30569175 FDII 2018 GILTI Liability (actual) 16.6866268 GILTI 2019 GILTI Liability (actual) 24.0567814 GILTI 2020 GILTI Liability (actual) 18.34664688 GILTI 2021 GILTI Liability (actual) 26.36028198 GILTI 2022 GILTI Liability (actual) 23.93767928 GILTI 2018 FDII Liability (tax expenditure) 9.54908829 FDII 2019 FDII Liability (tax expenditure) 11.9032787 FDII 2020 FDII Liability (tax expenditure) 13.74425451 FDII 2021 FDII Liability (tax expenditure) 22.42520028 FDII 2022 FDII Liability (tax expenditure) 29.58341505 FDII 2018 GILTI (foreign tax credit) 24.189176 GILTI 2019 GILTI (foreign tax credit) 33.835756 GILTI 2020 GILTI (foreign tax credit) 32.70456711 GILTI 2021 GILTI (foreign tax credit) 44.292105 GILTI 2022 GILTI (foreign tax credit) 54.98499511 GILTI 2018 GILTI Liability (tax expenditure) 40.8758028 GILTI 2019 GILTI Liability (tax expenditure) 57.8925374 GILTI 2020 GILTI Liability (tax expenditure) 51.05121399 GILTI 2021 GILTI Liability (tax expenditure) 70.65238698 GILTI 2022 GILTI Liability (tax expenditure) 78.92267439 GILTI
Year name value 2018 GILTI Liability 16.6866268 2018 GILTI Liability Net of FDII Tax Incentive 7.13753851 2019 GILTI Liability 24.0567814 2019 GILTI Liability Net of FDII Tax Incentive 12.1535027 2020 GILTI Liability 18.34664688 2020 GILTI Liability Net of FDII Tax Incentive 4.602392368 2021 GILTI Liability 26.36028198 2021 GILTI Liability Net of FDII Tax Incentive 3.9350817 2022 GILTI Liability 23.93767928 2022 GILTI Liability Net of FDII Tax Incentive -5.64573577
Year name value 2026 OBBBA Revenue Relative to 2025 Policy 12.25021595 2026 Additional Revenue Under Pre-OBBBA Tax Law 16.48783304 2027 OBBBA Revenue Relative to 2025 Policy 16.96409349 2027 Additional Revenue Under Pre-OBBBA Tax Law 22.83192121 2028 OBBBA Revenue Relative to 2025 Policy 17.97137347 2028 Additional Revenue Under Pre-OBBBA Tax Law 24.14715969 2029 OBBBA Revenue Relative to 2025 Policy 18.3117494 2029 Additional Revenue Under Pre-OBBBA Tax Law 26.05010296 2030 OBBBA Revenue Relative to 2025 Policy 18.44278239 2030 Additional Revenue Under Pre-OBBBA Tax Law 27.96455555 2031 OBBBA Revenue Relative to 2025 Policy 19.11574034 2031 Additional Revenue Under Pre-OBBBA Tax Law 29.3167426 2032 OBBBA Revenue Relative to 2025 Policy 20.06733579 2032 Additional Revenue Under Pre-OBBBA Tax Law 30.59057361 2033 OBBBA Revenue Relative to 2025 Policy 21.12660019 2033 Additional Revenue Under Pre-OBBBA Tax Law 31.81472214 2034 OBBBA Revenue Relative to 2025 Policy 22.22447019 2034 Additional Revenue Under Pre-OBBBA Tax Law 32.97606678 2035 OBBBA Revenue Relative to 2025 Policy 23.30205978 2035 Additional Revenue Under Pre-OBBBA Tax Law 34.20063136
