Our series on the One Big Beautiful Bill Act’s potential impact on U.S.-international supply chains
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), which includes international tax provisions aimed at modifying how U.S. and foreign companies design their global supply chains. This article discusses the bill’s relevant changes to the Foreign Derived Intangible Income (FDII) provision, which currently provides a favorable effective tax rate of 13.125% on U.S. corporate income related to the export of products and services, as well as foreign licensing.
OBBBA modifications to corporate export incentive
The OBBBA makes dramatic modifications to the FDII export incentive that — along with the U.S. Administration’s global tariff regime and the changes to the controlled foreign corporation GILTI rules — is driving international businesses to shift toward using the U.S. as a base for global sales, services, and licensing. The following describes the relevant rule changes and summarizes the implications the revised U.S. export incentive will have for the downstream end of multinational supply chains.
1. FDII rate increased less than 1%
U.S. corporations currently benefit from a 13.125% effective rate on their FDII export income due to an FDII deduction equal to 37.5% of their qualifying export income. The tax benefit applies to exports that occur as part of normal company operations. It does not apply to gain from sale or disposition of IP and other depreciable or amortizable assets.
Effective for tax years beginning after Dec. 31, 2025, the OBBBA permanently sets the FDII deduction at 33.34%, resulting in an effective tax rate of 14%. While higher than the 13.125% rate under previous law, this 14% effective rate is lower than the 16.406% rate that was scheduled to take effect in 2026 before the OBBBA was enacted. The permanence of this rate change will be a key to its effectiveness, as it reduces uncertainty and allows firms to plan long-term U.S. capital expenditures to leverage the favorable rate of global sales, service, and leasing income.
By maintaining a generously reduced rate on export income, the U.S. intends to drive more companies to use the U.S. as a base for serving foreign companies, even if they don’t necessarily move all their global production to the U.S.
2. Removes the QBAI tangible income Carve-Out
The international tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) did something that U.S. tax law had not done before. For purposes of applying the Foreign Derived Intangible Income provision, it bifurcates the active income of corporations into two buckets, tangible income and intangible income. This was accomplished by introducing the concept of Qualified Business Asset Investment (QBAI), which simply refers to an operating company’s cost basis in its depreciable operating assets. The FDII regime (somewhat arbitrarily) imputes a notional 10% return on a U.S. corporation’s QBAI and designates this amount as the company’s “tangible income” that is not eligible for the FDII export deduction. Only the remaining “intangible income” qualifies for the FDII tax benefit. This QBAI tangible income carve-out results in increasingly less export income qualifying for the reduced FDII rate.
The new provision introduced by OBBBA revokes the QBAI concept, along with the arbitrary separation of a company’s profits between tangible and intangible income. Consistent with this move, the OBBBA removed the word “intangible” from the Foreign Derived Intangible Income title, changing it instead to Foreign Derived Deduction Eligible Income (FDDEI). The removal of QBAI concept means that a U.S. corporation’s gross export income that qualifies for the FDDEI deduction must no longer be reduced by the notional 10% return on such corporation’s tangible business assets.
Along with the OBBBA’s revised bonus depreciation rule (which now allows U.S. businesses to expense 100% of their investments in plant, machinery, and equipment in the year placed in service), the removal of the QBAI tangible income carve-out will highly benefit U.S. and foreign companies that strategically shift production activity to the U.S. in order to avoid the burden of U.S. tariffs.
3. Expense apportionment of deduction eligible income
As if the removal of the QBAI carve-out wasn’t enough benefit for exporting corporations, the OBBBA also provides that, effective Jan. 1, 2026, U.S. export income qualifying for the favorable FDDEI tax rate will no longer be decreased by the allocation of interest and R&D expense. This rule change will allow U.S.-based companies with substantial leverage or R&D activity to further boost the FDDEI tax benefit. This is especially the case for U.S. subsidiaries of foreign businesses, which tend to be highly leveraged.
By eliminating this allocation, OBBBA strengthens the FDDEI benefit, making it a more effective tool to encourage domestic production for foreign markets.
Implications for U.S. and global supply chains
By substantially reducing export income that could qualify for the favorable export tax incentive, the FDII’s QBAI rule had a disproportionately negative impact on U.S. companies operating in R&D- and capital-intensive industries.
The OBBBA overhaul dramatically strengthens the export tax benefit for U.S.-based manufacturers and exporters by eliminating the requirement to reduce gross export income by the QBAI tangible income carve-out and the allocation of R&D and interest expense to gross export income.
The FDII modifications are part of the Administration’s plan to incentivize global businesses to move their supply chains closer to the U.S. The plan integrates the global tariff regime and GILTI “sticks” with the FDDEI “carrot” to achieve that aim.
In addition to the corporate tax benefit, this “home-shift” is also a strategic way to reduce global trade risks. The global pandemic and increased tensions with China have made businesses more aware that locating parts of their supply chain in far flung jurisdictions exposes them to serious risk of business disruption.
READ MORE: GILTI vs. NCTI: How tax changes could result in a ‘home shift’
FDII calculation per the 2017 TCJA
The calculation of Foreign-Derived Intangible Income (FDII) as provided by the 2017 TCJA involves several intermediate steps that substantially trim down a company’s gross export income to arrive at the “intangible income” amount that is eligible for the FDEE tax deduction. The calculation process typically involves the following steps:
Step 1: Determine deduction eligible income (DEI):
DEI is calculated by taking gross income minus six categories of exceptions, including Subpart F income, GILTI inclusions, foreign branch income, financial services income, domestic oil and gas income, and dividends received from controlled foreign corporations. The OBBBA would add the following two categories of exceptions:
- Any income and gain from the sale or other disposition of intangible property (including pursuant to a transaction subject to Section 367(d))
- Dispositions of other assets subject to depreciation or amortization by the seller. This amendment applies to sales or other dispositions occurring after June 16, 2025.
Under the FDII calculation, the allocation and apportionment of direct and indirect deductions against this modified gross income is a key step in scaling down the net DEI amount.
Step 2: Calculate deemed intangible income (DII) (Taxed at regular 21% rate)
- Determine the corporation's Qualified Business Asset Investment (QBAI), which is the average adjusted basis of tangible depreciable property used in the business to generate DEI.
- Calculate the Deemed Tangible Income Return (DTIR) by multiplying QBAI by 10%.
- Subtract the DTIR from DEI to arrive at the DII.
Step 3: Determine Foreign-Derived Deduction Eligible Income (FDDEI):
- Identify the amount of gross DEI that is considered foreign derived based on specific definitions for sales of property and services.
- For sales, this typically includes sales to a foreign person for foreign use.
- For services, rules are provided for different types of services, such as proximate services, property services, transportation services, and general services, each with specific criteria for determining foreign derivation.
- Subtract allocable cost of goods sold and other allocable deductions from the gross FDDEI to arrive at the net FDDEI.
Step 4: Calculate FDII
- FDII is computed by:
- Dividing the FDDEI by the DEI to obtain the Foreign-Derived Ratio (FDR), which can be represented as FDDEI/DEI
- Multiplying the DII by the FDR to calculate the FDII amount.
The formula for the above is:
DII x Foreign Derived Ratio (FDDEI/DEI)
Step 5: Take FDII deduction
Next, the exporting corporation multiplies its FDII amount by the applicable deduction rate. This rate is currently 37.5% under the TCJA FDII regime.
- It is important to note that the FDII deduction is subject to a taxable income limitation, meaning the total deduction cannot exceed the corporation's taxable income determined without regard to the FDII deduction.
- The resulting FDII deduction is then subtracted from taxable income.
FDDEI calculation under OBBBA (Effective Jan. 1, 2026)
Step 1: Determine Deduction Eligible Income (DEI):
- Start with gross income.
- Subtract:
- Subpart F income,
- Global Intangible Low-Taxed Income (now called Net CFC Tested Income (“NCTI”),
- Financial services income,
- Domestic oil and gas extraction income,
- Foreign branch income,
- dividends received from controlled foreign corporations,
- any income and gain from the sale or other disposition of intangible property (including pursuant to a transaction subject to Section 367(d)) as well as from
- Any income from sales or dispositions after June 16, 2025, of depreciable/amortizable property or intangible property
Step 2: Identify Foreign-Derived Deduction Eligible Income (FDDEI):
- From the DEI, isolate income from:
- Sales of property to foreign persons for foreign use.
- Services provided to persons or with respect to property outside the U.S.
Step 3: Apply the FDDEI Deduction Formula:
- Under OBBBA, the deduction is:
- FDDEI Deduction = Deduction = 33.34% X FDDEI
- This replaces the previous 37.5% deduction under FDII.