Content prepared by: Fernando Lopez, International Tax Partner

These articles analyze the potential impact of the One Big Beautiful Bill Act (OBBBA) on supply chains between the U.S. and the rest of the world.

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), which includes international tax provisions aimed at reshaping how U.S. and foreign companies structure their global supply chains. This article analyzes the relevant changes in the law related to Foreign-Derived Intangible Income (FDII), which currently provides a favorable effective tax rate of 13.1125% on U.S. corporate income related to the export of goods and services, as well as foreign licensing.

Changes Introduced by the OBBBA to the Corporate Export Incentive

The One Big Beautiful Bill Act (OBBBA) makes significant changes to the FDII export incentive which—together with the U.S. administration’s global tariff regime and GILTI rule changes for controlled foreign corporations—is pushing international businesses to use the United States as a base for global sales, services, and licensing. Below are the relevant regulatory changes and a summary of the implications that the revised U.S. export incentive will have on the final stage of multinational supply chains.

1. The FDII rate increased by less than 1%

Currently, U.S. corporations benefit from an effective rate of 13.125% on their FDII export income, thanks to an FDII deduction equal to 37.5% of qualifying export income. This tax benefit applies to exports made as part of the company’s normal operations. It does not apply to gains from the sale or disposition of intellectual property or other depreciable or amortizable assets.

Beginning with tax years starting after December 31, 2025, the OBBBA permanently sets the FDII deduction at 33.34%, resulting in an effective tax rate of 14%. Although this rate is higher than the previous 13.125%, it is lower than the 16.406% rate that had been scheduled to take effect in 2026 prior to the enactment of the OBBBA. The permanence of this change is key to its effectiveness, as it reduces uncertainty and allows companies to plan long-term capital investments in the U.S. to benefit from the favorable tax rate on income from global sales, services, and leases.

By maintaining a significantly reduced rate on export income, the U.S. seeks to encourage more companies to use the country as a base to serve foreign markets, even if they do not shift all their global production to U.S. soil.

2. Eliminates the exclusion of QBAI tangible income

The international tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) introduced a concept not previously used in U.S. tax law. For purposes of the FDII rules, corporate active income was split into two categories: tangible income and intangible income. This was done by creating the concept of Qualified Business Asset Investment (QBAI), referring to the tax basis of a company’s depreciable operating assets. The FDII regime imputes a theoretical 10% return on a U.S. corporation’s QBAI and designates this amount as “tangible income,” which does not qualify for the FDII export deduction. Only the remaining “intangible income” qualifies for the FDII tax benefit. This exclusion of QBAI tangible income has reduced the portion of export income that qualifies for the reduced FDII rate.

The OBBBA eliminates the QBAI concept and the arbitrary division of corporate earnings between tangible and intangible income. Consistent with this measure, the OBBBA removed the word “intangible” from the title of Foreign-Derived Intangible Income, renaming it Foreign-Derived Deductible Eligible Income (FDDEI). Eliminating QBAI means that U.S. corporations’ gross export income that qualifies for the FDDEI deduction no longer must be reduced by the theoretical 10% return on the company’s tangible assets.

Together with the OBBBA’s revised bonus depreciation rule—which now allows U.S. companies to deduct 100% of their investments in plants, machinery, and equipment in the year they are placed in service—the removal of the QBAI exclusion significantly benefits U.S. and foreign companies that strategically relocate production activities to the United States to avoid U.S. tariff burdens.

3. Expense allocation on eligible deductible income

As if eliminating the QBAI tangible income exclusion were not already a substantial benefit to exporting corporations, the OBBBA also provides that, beginning January 1, 2026, U.S. export income qualifying for the favorable FDDEI rate will no longer be reduced by the allocation of interest expenses or research and development activities. This regulatory change allows U.S.-based companies with high leverage or intensive research and development activities to further increase their FDDEI tax benefit.

This is particularly advantageous for U.S. subsidiaries of foreign companies, which often operate with high levels of debt. By eliminating this expense allocation, the OBBBA strengthens the FDDEI benefit, making it a more effective tool to promote domestic production aimed at foreign markets.

Implications for U.S. and Global Supply Chains

By significantly reducing the portion of export income that could qualify for the favorable tax incentive, the QBAI rule had a disproportionately negative impact on U.S. companies operating in research-intensive and capital-intensive industries.

The reform introduced by the OBBBA significantly strengthens the export tax benefit for U.S.-based manufacturers and exporters by eliminating the need to reduce gross export income through the QBAI tangible income exclusion and the allocation of R&D and interest expenses to such income.

The FDII modifications form part of the Administration’s plan to encourage global companies to move their supply chains closer to the United States. This plan combines global tariffs and the GILTI rules as “penalties” with the FDDEI incentive as a “reward” to achieve that objective.

Beyond the corporate tax benefit, this shift toward domestic operations also represents a strategy to reduce the risks of global trade. The global pandemic and rising tensions with China have made companies more aware that locating parts of their supply chain in distant jurisdictions exposes them to serious risks of operational disruption.

READ MORE: GILTI vs. NCTI: How tax changes may trigger a “homecoming”

FDII Calculation under the 2017 TCJA

Calculating Foreign-Derived Intangible Income (FDII) under the 2017 Tax Cuts and Jobs Act (TCJA) involves several intermediate steps that significantly reduce a company’s gross export income to arrive at the amount of “intangible income” eligible for the FDII tax deduction. The process generally involves:

Step 1: Determine Deduction-Eligible Income (DEI)

DEI is calculated by taking gross income and subtracting six categories of exclusions, 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 exclusions:

• Any income or gain from the sale or disposition of intangible property (including in a transaction subject to Section 367(d))
• Dispositions of other depreciable or amortizable assets 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 reducing the net DEI amount.

Step 2: Calculate Deemed Intangible Income (DII) (Taxed at the regular 21% rate)

• Determine the corporation’s Qualified Business Asset Investment (QBAI), which is the average adjusted basis of depreciable tangible property used in the business to generate DEI.
• Calculate the Deemed Tangible Income Return (DTIR) by multiplying QBAI by 10%.
• Subtract DTIR from DEI to obtain DII.

Step 3: Determine Foreign-Derived Deduction Eligible Income (FDDEI)

Identify the portion of gross DEI that is considered foreign-derived using specific definitions for sales and services:

• For sales: typically sales to a foreign person for foreign use
• For services: rules vary depending on the type (proximate services, property-related services, transportation services, general services)

Subtract cost of goods sold and other allocable deductions from gross FDDEI to yield net FDDEI.

Step 4: Calculate FDII

FDII is calculated as:

1. Divide FDDEI by DEI to obtain the Foreign-Derived Ratio (FDR)
2. Multiply DII by the FDR

Formula:
FDII = DII × (FDDEI / DEI)

Step 5: Take the FDII Deduction

The corporation multiplies its FDII amount by the applicable deduction rate (currently 37.5% under TCJA).
The FDII deduction is subject to a taxable income limitation, meaning the total deduction cannot exceed taxable income (determined without the FDII deduction).

FDDEI Calculation under the OBBBA (Effective January 1, 2026)

Step 1: Determine Deduction-Eligible Income (DEI)

Start with gross income. Subtract:

• Subpart F income
• Global Intangible Low-Taxed Income (now Net Tested CFC Income “NCTI”)
• Financial services income
• Domestic oil and gas extraction income
• Dividends received from controlled foreign corporations
• Any income or gain from the sale or disposition of intangible property (including Section 367(d) transactions)
• Any income from sales or dispositions after June 16, 2025, of depreciable, amortizable, or intangible property

Step 2: Identify Foreign-Derived Deductible Eligible Income (FDDEI)

From DEI, isolate income from:

• Sales of goods to foreign persons for foreign use
• Services provided to persons or with respect to property located outside the U.S.

Step 3: Apply the FDDEI Deduction Formula

Under the OBBBA, the deduction is:

FDDEI Deduction = 33.34% × FDDEI

This replaces the previous 37.5% deduction under the FDII regime.