On this episode of “GILTI Conscience,” Skadden tax attorneys David Farhat, Paul Oosterhuis, Loren Ponds, Eric Sensenbrenner and Stefane Victor break down the sweeping U.S. tax reform enacted in July 2025, with a focus on the latest international tax developments. The panel discusses major changes to provisions like GILTI (now NCTI), the evolving landscape of cross-border tax planning, legislative strategy, Treasury guidance and the global response to U.S. tax policy.
Episode Summary
This podcast’s title hasn’t changed, but on the international tax stage GILTI is converting to the new CFC-tested income (NCTI) regime.That’s just one shift brought about by the One Big Beautiful Bill that Congress passed on July 4. Skadden colleagues Loren Ponds, Eric Sensenbrenner and Paul Oosterhuis break down the bill’s implications in this conversation with David Farhat and Stefane Victor. The panel explores the legislative process, the impact of dropped provisions such as Section 899 and key planning considerations. Tune in for their insights about how corporate stakeholders can navigate the new landscape.
Voiceover (00:02):
This is GILTI Conscience. Casual discussions on transfer pricing, tax treaties, and related topics, a podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now your hosts, Skadden partners, David Farhat and Nate Carden.
Stefane Victor (00:35):
Hello, and welcome back to another episode of GILTI Conscience. My name is Stefane Victor, and I’m joined by host, David Farhat. Nate and Iman are not able to join us today, but we have an all-star cast of Skadden partners, Eric Sensenbrenner and Loren Ponds and of counsel, Paul Oosterhuis. On today’s episode, we’ll be discussing recent tax reform passed in July this year, and its implications, including what areas need guidance from Treasury, and how Pillar Two side-by-side might look from the US perspective. I’ll now pass it on to Loren to give us a preview of what’s in and out.
Loren Ponds (01:12):
All right, thank you Stefane. So, as you mentioned, we did have the One Big Beautiful Bill. It was enacted on July 4th, so earlier this summer, and there were some significant changes in the international space as well as some domestic rules that have greatly impacted taxpayers apart from individuals, so corporate taxpayers. On the international front, there are some name changes to some of our favorite provisions. GILTI is now locally known as NCTI. FDII has gone to FDII and then we still have the BEAT.
David Farhat (01:46):
Do we have to be NCTI conscious now?
Loren Ponds (01:49):
You do.
Stefane Victor (01:50):
I still prefer NCTI. That’s just my own personal thing and I do like FDII. It sounds a little more European.
Loren Ponds (01:58):
It does, it sounds exotic, FDII. For GILTI, NCTI, NCTI, the rate is now 14%. There is formally no expense allocation to the GILTI basket. So, in addition to prior rules that said there was no R and D allocation to the GILTI basket, it’s clear that we also don’t allocate other expenses such as interest. In addition, QBAI has been eliminated from GILTI as well as FDII. So, there are some parallels in terms of the rates on both are 14% and the expense allocation rules are similar, so there’s no allocation also to FDII or foreign derived deduction eligible income, which is what FDII stands for.
(02:39):
In addition, those changes have brought about some considerations that we’re going to get into with regard to planning and what other considerations taxpayers might take into account when dealing with the changes in the provisions. With regard to the BEAT, the rate has gone up just a little bit to 10.5%. Threshold remains 3% unless you’re a bank, and so that rate has gone up to 11.5% with a 2% threshold. Significantly, there’s no high tax exception, which was under consideration in the Senate version of the bill, but it did not make it into the final version.
Paul Oosterhuis (03:13):
I think one of the interesting things is what they weren’t able to put in. We can talk about section 899 later because that was obviously a big deal, but just within the structure of the international rules, as you mentioned Loren, they talked about putting a high tax exception into BEAT and lowering the 3% to 2%, and that cost $48 billion over 10 years, but it was in the first version of the Senate Finance Committee bill and then was dropped out. A lot of us thought it was dropped out because when Section 899 was dropped out, they lost revenue.
(03:50):
But actually what we were told by the folks who were there is that no, that’s not the primary reason that if 899 had stayed in, they would’ve still dropped it out and it was because nobody was cheering for the provision. And in talking to folks in the hill and thinking about client reaction, I think there were two reasons why people didn’t cheer that maybe people ought to rethink. Maybe it was a mistake. One is the high tax kick out. It was at 18.9% first of all and was complicated. And so, a lot of companies weren’t sure that that would really help them that much.
(04:30):
The other thing was I think a lot of US multinationals panicked at the 3% going down to 2% because they knew how hard they had to work to get under 3%, but what they probably didn’t take into account is that the 3% to 2% in a sense was a conforming change because the numerator is reduced by the high tax BEAT payments. And so, you’re only talking about the payments that remain BEATable after the high tax kick out is applied. And my guess is that for most companies, that means the 2% in the bill is actually easier to meet than the 3% under present law. But things happened quickly.
(05:13):
There wasn’t a lot of communication. And so, in some ways, I think it was a real opportunity that was missed not to have patted everybody on the back on the hill and praise them for it and hopefully had it stay in.
Loren Ponds (05:26):
Yes, particularly when people have been such vocal proponents of softening the BEAT and when you get it, I can speak from experience working on the hill, when you think you’re gifting taxpayers something in a provision and all you get is pushback, it becomes very easy for that provision to disappear from the final bill, particularly when we’re talking about the cost in addition to the poor reception.
Eric Sensenbrenner (05:50):
Yeah, I was just going to say the fraction is a real point though. I mean I think that it’s just what Paul was saying, I think the speed with which things were happening, there really wasn’t the full light of day, at least that I saw in full consideration of that because I think that’s a point that was very often missed is that you were taking the high-tax payments out of the entire calculation.
Paul Oosterhuis (06:08):
Right. Now, what that tells me is that to some extent it has a good housekeeping seal of approval because it was in a Senate finance bill. And so, if companies on reflection are enthusiastic about it, there is a hook to push legislators to get it back on the table anytime there’s another bill, which who knows whether it’ll be in our lifetimes, but nonetheless, it’s always good to be ready. And so, for folks who on reflection might like that provision, I think it’s good to make sure that people on the hill understand that.
David Farhat (06:41):
So, Paul, what would that advocacy look like, right? Because I remember we had an episode where we talked process with Loren and Loren made the point of be vocal, talk to folks and see what you want to get in. What should that or could that advocacy look like?
Paul Oosterhuis (06:54):
That’s exactly what it should be. I mean, first of all, trying to find a sponsor to introduce the bill now. Senator Tillis had it in an international bill, but he is retiring at the end of next year. So, it would be good to have somebody who’s a Republican on ways and means or Senate Finance if you can introduce the bill now and express their disappointment that it wasn’t included and try to get a lot of sponsors to get some momentum for it to be included. And then just go talk to people on the hill, talk to staffers, try to overcome the negative image that they have now because of folks who were not happy with the proposal when it was up before and just try to reframe the situation to be ready for the next time because you never know.
(07:45):
Well, I mean Speaker Johnson talks about, and everybody laughs about a second reconciliation bill later this year or early next year, but you never know, so might as well do the work and be ready.
Eric Sensenbrenner (07:56):
But is it important, Paul, strategically to get it out there now even if it was a standalone proposal so that it’s out there becomes a known thing that you can ultimately, let’s assume there is a second reconciliation bill as Speaker Johnson has suggested that it could get folded in there by way of cleanup or almost technical fixes on the OB3.
Paul Oosterhuis
(08:16):
Absolutely. So, a second thing that didn’t get in was foreign tax credit carry forward in the GILTI basket. And nobody can argue that a carry forward is bad tax policy, right? Clearly, not having a carry forward is bad tax policy because you have arbitrary taxation based on temporal differences that over the long run don’t make sense. What we were told was that they had some constraints on what they could do with GILTI. One was the rate couldn’t be higher than 14% taking into account any credit disallowances, which is today, it’s at 12.6% with a 10% disallowance, so that gets you to 14. They said it couldn’t be higher than 14. And so, there were some things they couldn’t do.
(09:08):
They could within that constraint, afford to get rid of expense allocation and there’d been so much pressure on expense allocation and doing a carry forward was more expensive, believe it or not, than getting rid of expense allocation. So, they couldn’t do both. And indeed, I don’t think they could have done a carry forward even if they didn’t do the expense allocation provision that was in the bill. And so, we’re stuck with no carry forward in GILTI, and that really means doing what taxpayers have had to do for the last few years, which is really manage the timing of your income compared to what foreign taxation is to try to minimize the damage from a lack of the carry forward.
(09:52):
It’s really too bad that revenues drive bad tax policy, but here’s a classic example of where that happened.
Eric Sensenbrenner (09:59):
And there is a lot of planning, right? I mean, we’ve been doing a lot of planning around GILTI already in terms of sub-part F planning, 901 planning, if you will, right? I mean it seems to me that what it means is that that will have to continue.
Loren Ponds (10:12):
It will, it will. I mean it could have. We should say, I don’t think I mentioned at the top of the podcast that the haircut has been reduced from 20% to 10%. Theoretically they could have done a credit carry forward, but the haircut would’ve had to have been much higher and you wouldn’t have expense allocation. And I don’t think that’s a trade-off that a lot of taxpayers would’ve been willing to make.
Paul Oosterhuis (10:35):
That’s right. You don’t get many taxpayers going in and saying, “Give me a carry forward because it’s so obvious that they should have it.” Expense allocation is something that requires some consideration and so people talk about it. I guess the other thing that we should raise that wasn’t in the bill was 899, right? Loren, why don’t you describe that a little bit?
Loren Ponds (10:55):
So, 899 was originally introduced by Chairman Smith several years ago actually in draft form. And it was a retaliatory provision aimed at countries and companies who are resident in those countries that have imposed either a digital services tax, UTPR under the Pillar Two regime. In its earliest iteration, it also included reference to the diverted profits tax in the UK, and it would’ve ratcheted up the standard rates on tax that these companies would’ve paid up to an additional 30% over the standard rate. And so, extremely, extremely burdensome tax. It cost a lot of uproar. I think that’s an understatement in terms of those who would’ve been subject to the tax.
(11:42):
Ultimately, there was significant concern that the imposition of that tax would royal the financial markets and have far-reaching impacts on foreign parented companies and their ability to invest in the US market. And by some accounts, that did not fall on deaf ears amongst some in the administration. But at the same time, it was felt that this provision was needed to have some leverage in the conversation around Pillar Two and getting some kind of relief with regard to our non-refundable R and D credit and also the GILTI architecture.
(12:18):
And so, at the end of the day, Treasury was able to announce a side-by-side agreement whereby work would continue on recognizing that GILTI was a compliant regime in the Pillar Two context in exchange for taking 899 out of the bill. So, much like the high tax exception and BEAT, it remains drafted. It’s on the shelf and the conversation has now turned to when will it come back if it does. I’ll leave it to my co-podcast panelists.
Paul Oosterhuis (12:50):
Yeah. And in the last two weeks there has been discussions of reviving it as folks in OECD have been struggling perhaps to get everybody comfortable with the side-by-side. It is interesting, makes perfect sense for the US to be continuing to wave that flag and say this is going to happen unless everybody cooperates. It’s not so easy to be clear now because my sense is that most Democrats, in fact, all Democrats would not vote for it because it hurts inbound investment and they’re not fans of side-by-side. They think having the BBB type approach to Pillar Two is perfectly fine. And so, it’d have to go in reconciliation.
(13:34):
And of course in order to do reconciliation, you’ve got to have a budget and you’ve got to have instructions for all the committees. So, I mean if 899 were the only reason to do reconciliation particular year, it’s a lot of pain to go through to get it done. Now that could happen for sure, but I just have to keep in mind how difficult it would be.
Eric Sensenbrenner (13:56):
It’s interesting. I mean it was tremendously effective in terms of the stick approach, right? I mean just having it in there was tremendously effective, but yet there were so many defects with it, right? The provision itself I think had a lot of problems. It never actually fully made it through a birdbath, right? I mean the parliamentarian ruled on jurisdictional issues, but not on the budgetary issues. So, all of those things would still be considered, again, right? It would be up for being challenged even if it was to make it back into a reconciliation bill, which as you say, I think practically is the only way it would get through. So, the continued impact of it to drive the side-by-side negotiations to me is questionable.
(14:39):
I mean it’s out there. As you said in the last week or so, it’s already been threatened as the conversation is ongoing with the G7 OECD. But it’s interesting to me because at the end of the day how effective of tool it will be is still very much in question.
Loren Ponds (14:54):
Yeah, Eric, I think I’m more on your side in terms of how many times can you roll out 899 and use it as a threat where Yeah, and at some point, we’re going to start being treated like the boy who cried wolf. And we’ve spent a long time in the context of OECD rules, guidelines, so on and so forth, talking about our legislative process and how it’s different and special and we can’t adopt rules. We don’t have a parliamentary system, and so people know that it takes us a while to get legislation across the finish line, or can take a while to get it across the finish line. And so, there’s I think a little bit of hesitation to take it as seriously as last time maybe.
(15:34):
But then on the other hand, we have the statement that came out when the side-by-side was announced whereby the administration said, if you slow walk, you being the inclusive framework, the process to getting to this side-by-side agreement, we’ll come back.
David Farhat (15:49):
From outside, it appeared that 899 was a big motivating factor for the side-by-side. If as you’re saying that’s going away, what’s the motivating factor for it, right? Because it seems like it’s really hard to come back and Eric, we talked about this the other day, is it just a good move to agree, get the US to take it out and then now they have all these procedural hurdles to going back to it. So, is there anything to motivate the continued efficient discussion of side-by-side?
Eric Sensenbrenner (16:19):
You could imagine 899 light, right? I mean you could imagine different versions of this. Look, we had 891, we’ve got 896. We’ve seen this throughout the history of the internal revenue code, these kinds of provisions. And frankly, they have in the past at least they’ve worked. They’ve done what they were intended to do in terms of either getting a treaty imposed or getting a treaty adopted or other changes made. So, you could imagine some other version of a retaliatory measure that could presumably make it back in even if it isn’t the full-blown 899 with all of its different aspects.
Paul Oosterhuis (16:52):
I also think, David, to your question that talking about foreign governments here, they’re the ones that have to accept side-by-side and they’re the ones that 899 is intended to influence. If they really believe in Pillar Two, which is a better world Pillar Two with US going along with a side by side and respecting everybody’s QDMTTs, or a world where foreign countries are going after our companies with UTPRs and we’re going after foreign countries to get them to strip out their QDMTTs seems to me the former world is better than the latter world if you believe Pillar Two is a good thing. And from my perspective, I believe it is, and QDMTTs are appropriate floor under tax rate competition.
(17:42):
And so, letting the US proceed with its side by side getting UTPRs for US companies and their affiliates off the landscape and having the US abide by other countries, QDMTT seems to me to be the right course of action, independent of any influence of 899.
David Farhat (18:02):
But Paul, it appeared prior to 899 that the kind of chaos you’re describing was there anyway, and it didn’t seem like folks were going towards that side by side.
Paul Oosterhuis (18:13):
Well, but in fairness, I mean we just first raised it in April at the South African meeting of the inclusive framework and the legislation was going forward in May and June. It’s really hard to tell how it would’ve proceeded had we not had the real threat of 899. It certainly helped get it on the table, but I think as important has been the education process that’s been going on with foreign countries on the robustness of our system, both in taxing domestic income once you have credits like the R and D credit being okay under Pillar Two, which is true, it is robust. Our CAMT is a 15% minimum tax and it keeps you from tax rate competition for the companies that are subject to it. And then GILTI, GILTI is peculiar in many ways.
(19:10):
It has no cue by now, whereas Pillar Two has its substance. It has no FDII, whereas Pillar Two is based on tax accounting. And so, some people get clobbered by GILTI and wouldn’t get clobbered by Pillar Two and vice versa. But it’s hard to say except for a couple of situations. It’s hard to say that one system is defective and the other system works well.
Loren Ponds (19:35):
But Paul, you raised a good point when if we think about the history, the evolution of the Pillar Two discussions over the last eight years or so, it actually is rather extraordinary that we’ve made this much progress with this shift in the administration’s priorities and their narrative with regard to GILTI in Pillar Two. Under the Biden administration, there were efforts to modify GILTI such that it looked just like the Pillar Two regime. It looked just like an IIR, right? And so, to go from that to January of 25 with a new policy that says actually we’re this is good enough.
(20:17):
If we think about the US system taken as a whole, it looks a lot like Pillar Two regime and nobody’s really getting by with much less than 15% when you apply these provisions together. And we want that to be recognized.
Stefane Victor (20:37):
Kind of what led me to my question of do you think the side-by-side framework can survive changes in US or European leadership, or is it more at risk if one government backs out?
Loren Ponds (20:49):
I think if we can get there, then it has durability if we can get there is the big part.
Eric Sensenbrenner (20:55):
I’m curious what others think in terms of how is it going in terms of getting to a true side-by-side system. I think there’s two levels to this. There’s the scoping question of what is US and what is exempted, and then there’s the whole application of a QDMTT and how exactly that works. So, once you get to a side-by-side system, now you’ve got asset movements, you’ve got stock, you’ve got asset. You’ve got globe rules that deal with that generally. You’ve also got US rules that deal with that.
(21:32):
So, if you’re moving assets down into a QDMTT jurisdiction from the US, for instance, what are the basis for results there? Is there a gain recognized or not? That whole level of plumbing, which to me goes far beyond what I think probably is going to be the first step of this as a framework agreement with some safe harbors to scope what’s in and what’s out. In other words, what is US and is going to be left alone, but then moving to that second step of the whole plumbing of actually operating these two systems side-by-side with minimal interaction, but yet there is still interaction in how you coordinate those rules.
(22:11):
I think there’s actually going to probably be a lot of work that needs to be done, and I’m guessing that’s going to be phase two after you get to an overall agreement.
David Farhat (22:20):
Let me ask another question. Given this introduction of side-by-side, is there a possibility of more complication? Did another jurisdiction come up and say, “Hey, I want to be side-by-side as well, right? I have no interest in going into Pillar Two, so...”
Paul Oosterhuis (22:34):
It may be happening with China, for example, maybe India to some extent. Yeah, that could be happening. And I think that’s one of the fears that some of the foreign countries have about allowing the US side-by-side, as well as fears about some of what Eric was talking about, which is, well, if there is side-by-side, what tax planning will US companies engage in to arbitrage the two systems that we haven’t thought about now? And that’s a pretty difficult thing to predict, right?
(23:12):
Because it’s dynamic as we all know from having been involved in tax planning, we’ll accept Stefane for a long time that these ideas, once the rules are out there, the ideas for how to maximize the taxpayer advantages don’t come into your head within 24 hours or 24 days or even 24 months. Sometimes, it takes years for them to be identified, thought about seriously. And to the point where they’re implemented, they just evolve over time. But that would happen even if we had BBB. I mean, some people have said BBB itself was a side-by-side because while it was per country and 15%, it was tax accounting, not financial accounting. And so, it’s just a matter of what our side-by-side looks like.
(24:03):
And I think one of the things that’s bothering some of the folks in the inclusive framework outside the US is will our rules change again? I mean we had them in ‘17, we had some significant changes in ‘22, we had the changes this year in ‘25. And so, if for example, a lack of a carry forward is one of the selling points for side-by-side, what if we fix that next year? Does that mean we fall out of side-by-side? Probably not. But in the end, I think our Treasury Department’s attitude is, look, you can wring your hands all you want and worry all you want.
(24:39):
Life’s going to be better for all of us if we just agree to side by side and go forward than if we fall into the rabbit hole of having UTPR start applying to foreign affiliates of US companies.
Loren Ponds (24:52):
But Paul, this reminds me of the conversation we had the other day. When are we worried about the rules being mostly fit for purpose in most circumstances, 95% coverage, we cannot try to enact policies whereby there’s no leakage, right? There’s no opportunity for planning. You can’t anticipate what’s going to happen in the future. And I think part of the conversation that’s happening within inclusive framework is getting bogged down on the 5% and not the 95% and we got to move on. We got to move on.
(25:28):
Because the longer it takes to get to win over the folks who are in that 5% camp and want to shut down every possible planning idea that no one’s even thought of yet, the harder it’s going to be to keep the people who are in the 95% camp on board.
Paul Oosterhuis (25:45):
No, that’s right. I mean the one hole in that, let’s face it, is Puerto Rico for us because Puerto Rico is the main jurisdiction where there’s a material amount of CFC income of US multinationals that likely won’t have a QDMTD starting next year. And the answer has to be, well, okay, but that’s fairly limited. Puerto Rico is a territory of the United States, but of course we don’t take it into account in our CAMT as being part of the United States. So, it is a bit of a hole. And the one thing I think foreign countries could point to is, but you have to be able to average your credits, right?
(26:25):
You have to be able to have high tax someplace else and low tax in Puerto Rico. Not clear to me that the companies that have substantial operations down there have the kind of excess credits that would allow them to really take big advantage of averaging.
Eric Sensenbrenner (26:42):
Given the way GILTI NCTI to works, I mean it really is about the credit averaging, isn’t it? It’s not like the income is escaping tax, it’s all fully taxed income currently in the US. It’s just a question of the credit averaging, right?
Paul Oosterhuis (26:55):
Yeah, it’s the cross crediting, that’s the problem. And the worry they have that in the future we may try to talk countries out of their QDMTT, so that they’re like Puerto Rico and we can take advantage of averaging. Whereas under Pillar Two, if you don’t have a QDMTT, you’re just shooting yourself in the foot because somebody’s IIR is going to pick it up.
David Farhat (27:19):
So, going back to 899, 899 was broader than just the Pillar Two stuff, right? There was DPT and DST, is it dead for those things or could it come back, just looking at non-Pillar Two?
Loren Ponds (27:35):
The house version is the one that had the diverted profits tax. I think that for reasons that made sense, it was not included in the Senate version, the DST counterbalance, it could be used for that, although those in the administration, Secretary of Commerce and others have indicated that DSTs are better fought through trade measures as opposed to tax measures. So, they will continue to have conversations in the trade space with countries who impose DST. So, it’s unclear to me that you can say whatever you want in legislation, but it’s unclear to me whether it would be used in such a narrow way.
Paul Oosterhuis (28:16):
899 is a club that you never want to have to use, right? You want to just get it to change behavior. So, it works when the behavior that you’re trying to change has a good shot at being changed, and that puts the application of UTPRs in a much different category than DSTs. DSTs are there. They’re raising substantial money. And I think it’s 3 billion in the UK, for example, per year, of which a majority of it is US companies, but not all by any means. And their popular taxes in those jurisdictions among the people, even though as a tax on revenues, they likely increase the cost of their consumers, but it’s not a line item on their bill from Google or from Amazon, and so they don’t necessarily know that.
(29:04):
So, I think we apply 899 to DSTs that are peril, because it could actually have to happen and then we would be hurting ourselves because we’d be hurting foreign investment in the United States. And those are real jobs, many of them in manufacturing. Hopefully if 899 comes back, it would be limited to YARs and as Loren said, use other measures to deal with DSTs. It’s interesting because I think many of us heard Congressman Estes at an AEI conference, when was it in the summer sometime? It was while the bill was going. So, say that he was actually disappointed that prior Biden administration hadn’t put more focus on Pillar One because from his perspective, getting rid of DSTs is a high priority.
(29:54):
And so, it’s entirely possible that there can be some reformulation of pillar one effort going forward once the side-by-side is worked out to see if that can’t be a route for dealing with DSTs as well.
David Farhat (30:10):
So, Eric, quick question on the planning side and things to think about. It’s for our corporate listeners, tax directors. What kind of things should folks be thinking about or doing right now with all of these changes we discussed the possibility of side by side and all of that other good stuff?
Eric Sensenbrenner
(30:27):
Well, so first of all, just starting the side by side, look, it’s in process and I full well expect that at the end of the day, we’re going to get there with some kind of agreement. As I said, I think that the next level of how you actually have operating rules that work and deal with it going forward once you accept a side-by-side could get very difficult, but I think that’ll be worked out as well. What I’m seeing is to the extent clients had planning that they were undertaking to deal with the prospect of UTPRs, that by and large is continuing just because we don’t know the timing, we don’t know what a transition’s going to look like and there is at least a possibility that there may not be an agreement reached.
(31:05):
So, that is very much continuing from what I’m seeing. The other aspect of it that is not so much about the side-by-side system and then of course foreign tax credit planning, optimizing your QDMTT taxes that you’re paying, that is going to continue I would expect in full force. We’ve been seeing a lot of that and that’s going to continue. On the domestic side in terms of the legislative changes, F-D-I-I or FDII is I think now becoming a much more interesting and much more robust tool for attracting investment, both for us multinationals thinking about bringing assets back, as well as perhaps for inbound investment as well.
(31:43):
I mean the prospect of not having expense allocation I think is something that makes it much more attractive than it had been. And so, I think we’re going to be seeing more in that space as well. The other change that we should just mention is the change to 163J and the fact that we’re no longer including CFC inclusions. That is, I’ve likened it to a 163N light approach, but that’s something where I think obviously 163J is going to be much more impactful in terms of constraining company’s abilities to borrow tax efficiently. So, that’s also I think been driving some planning.
Loren Ponds (32:23):
Eric, you raised a good point about FDII, and I think in conversations with clients what looks like a great provision on its face can have some thorny issues. When you think about interaction with CAMT and I joke that this bill is like one hand give it, the other hand take it away because of so many interactions. And so, you might be really excited about today until you start the modeling and then realize...
Eric Sensenbrenner (32:50):
And then you realize it just pushes you into a CAMT liability. I have felt, and maybe I’m being overly optimistic here, that there’s more to come on CAMT in terms of the deregulatory agenda and ultimately what happens there that when you were talking about the 955 solving for the 5%, to me CAMT is a case and study of that, of just trying to solve for everything where you took a regime that was, look, it’s an AMT. It was intended to be very broad brush high level, and then you try to solve for everything. I think it’s like 901M as the poster child for that, but I’m expecting some relief there.
Loren Ponds (33:26):
Well, there have been statements by those at Treasury who...
Paul Oosterhuis (33:30):
But would any of that relief really help our exporters of goods, IP and services that now have what could be close to a gross income, particularly for product exports incentive in FDII, if that’s a big enough part of your business that it drives you down to a 15% rate. It seems to me CAMT is still going to be a pretty solid floor under that. And I don’t want to mislead any foreigners who are listening, any foreign country people who are listening here that CAMT is full of holes and you can get your rate down below 15% because I think you’re talking about edge cases, Eric, right?
(34:11):
That not the fundamental cases because when you think about it, if you’re exporting goods and so your gross income is net of cost of goods sold and you’re exporting to a foreign affiliate, you’re not going to have a lot of sales expenses that are allocated to that income and you’re not going to have interest or R and D allocated to that income. So, it is pretty close to a gross income incentive, which can be pretty powerful. And I think the same thing with royalties and services. I mean, services doesn’t have a cost of goods sold element, but the cost of providing the services is equivalent. So, it’s a pretty powerful incentive.
(34:50):
But CAMT is there as a floor that we’re glad to have now in the inclusive framework side-by-side discussions. We may not be so glad to have it once that’s behind us.
Eric Sensenbrenner (35:02):
Yeah, I mean that gets back to the durability of side-by-side if there are subsequent legislative changes in the US, right?
Paul Oosterhuis (35:08):
In terms of planning, one of the things that’s interesting, we were with a client yesterday and it’s a second or third client that has talked about this with us. Now that you’re not allocating interest for GILTI purposes, all the folks who made the high tax election are rethinking that the high tax GILTI election, high tax, GILTI and sub-part election because you have to be consistent. But there are enough states that are taxing GILTI these days that the real downside in not making the election, which gives you more credits in case you need them for excess credit purposes, is that you now have GILTI subject to state tax without any foreign tax credit of course.
(35:52):
And so, that gets apportioned among the states, but for some clients, the portion that is allocated to states with GILTI make it worthwhile for them to continue to have high tax exception. And that’s probably one of the main reasons why companies will continue to elect it.
David Farhat
(36:11):
Let me ask this, it might be a bit of a weird one, but with all this incentivizing of taxpayers to come into the US or bring things back into the US, could that cost some heartburn for the inclusive framework in the side by side?
Paul Oosterhuis (36:24):
No. I would say no, because the countries they’re coming from are investment hubs as they call them. So, it’s Ireland, Singapore, Puerto Rico, the Netherlands, Switzerland. I think the Pillar Two advocates would be happy with that. Well, of course the Irish have an exit tax, so it’s very hard to leave Ireland, but the investment hubs may not be happy with it, but I don’t think many people have sympathy with them if some of the US income that they formerly had and that was distorting their gross domestic product moved back to the United States.
Eric Sensenbrenner (37:02):
And we still have CAMT that functions like a QDMTT in the US, right?
Paul Oosterhuis (37:06):
And David, I think a lot of folks don’t appreciate how difficult it is in many of these countries to actually bring the IP back. I mean, you can check the box on the foreign entity, and so the US is directly taxing with a foreign tax credit that income, but it’s still getting taxed in the local jurisdiction where the IP is owned in some jurisdictions. It’s just not that easy to bring it back. From my perspective, maybe the Trump administration should be talking to those countries about being more lenient in allowing US companies to bring back their IP. Maybe they could get breaks on their tariffs, for example, if they decided to suspend their rules on US companies bringing back their IP.
(37:54):
Because it’s really, those countries are unfortunate winners in cost sharing because most of them are cost sharing. If you’re not cost sharing, it’s easier to get out of it. And they’re getting more income than what most observers would say they ought to get, certainly more than OECD guidelines would say they ought to get. And so, for them to get a huge windfall when you leave is pouring gas on the fire. I mean, it just makes things worse. But I don’t think anybody’s thinking that far down the road on whether the Trump administration should try to use its bully pulpit to get some of these countries to be more flexible in letting US companies repatriate their IP.
(38:40):
But the one thing I will say is after the 17 Act, and I think a lot of others were really nervous about repatriating your IP, if you could do it because we didn’t think FDII would stay around. It has stayed around. It survived the Biden administration and now it’s a really generous incentive subject to CAMT. And so, I think you can feel a lot more comfortable in planning on it being here indefinitely, as long as you can plan on anything being here, whether it’s the R and D credit or whatever. It seems to me, if there is a way of getting your IP back and if that works for you, this is a good time to do it.
Eric Sensenbrenner (39:22):
You say if there is a way, Paul, I mean it’s not just the foreign exit tax considerations, there’s also US gain recognition, which could be a major impediment to trying to bring IP back.
Paul Oosterhuis (39:32):
Totally agree, totally agree. And again, I think with a little education in the Trump Treasury Department and that filtering down to the IRS, we might be able to make some progress because it really is a green eye shade, if I might say so perspective on 1,001 to say if you terminate your cost sharing agreement, that’s a taxable event. You can understand the argument, but let’s get real. Cost sharing is something that a lot of companies would like to get out of. It’s something that’s very much in the federal government’s interest to let them get out of. And so, finding mechanisms both in the foreign country and the United States to have that happen would be very useful.
Eric Sensenbrenner (40:27):
And given that qualified cost sharing is also a creature of regulations, it seems to me that it would be possible to craft a regime there that would allow you to do it without doing greater violence to the overall structure of the code.
Loren Ponds (40:41):
You could. I mean, the policy rationale for doing it is completely justified these days. We’re not living in a deferral regime. And so, where you want to force gain recognition, and I think if we have a conversation, probably several conversations with the administration about why this makes sense from a policy perspective, given where we are in 2025 versus maybe the mid-90s, when did the cost sharing ranks first start, we’ve come a long way.
David Farhat (41:11):
So, they should put that on the high tax exemption. The list with high tax exemption would be...
Loren Ponds (41:17):
On the list. Yeah, the BEAT high tax exception, getting rid of gain recognition roles when you unwind a cost sharing and repatriate IP, all kinds of things. We have plenty of ideas.
David Farhat (41:30):
So, any other things to worry about? I know we’re talking a little bit earlier about these rules give us and take it away. Any other major pitfalls that folks should be aware of?
Paul Oosterhuis (41:43):
Well, I mean the timing differences, we talked about this between GILTI and QDMTT is a serious problem. I like to use the example of somebody who decides to build a new factory in a country that has a QDMTT and that because it’s based on financial accounting, allows the impact of accelerated depreciation without triggering a QDMTT liability, but it doesn’t have the same impact for GILTI purposes, right? So, you’re going to be taxed in the early years on GILTI, even though the foreign country has a QDMTT unless you have excess credits to shelter it. But whether the particular company does or not, it can lead to double taxation because there’s no QDMTT in the early years.
(42:37):
There will be in the later years and they’ll be GILTI in the early years and less so in the later years. So, those timing mismatches are something that really are going to require a lot of work to try to manage. And hopefully at some point, we can get some of these things straightened out. I’m told from a revenue point of view, if the US were to adopt to carry forward and go to 15% in a per country, it would not raise revenue. If anything, it would lose a little bit of revenue. So, maybe someday people will start thinking about that again because that would go a fair ways to try to mesh the two jurisdictions.
Loren Ponds (43:25):
Well, if we can ever get back to a world where we have bipartisan tax legislation, we might be able to consider some of these things, because cost won’t be so paramount of a concern as it is in a reconciliation bill.
Paul Oosterhuis (43:40):
Good luck with that. Yeah.
Loren Ponds (43:45):
I know I’m the optimist of the bunch. I don’t know when that’s going to happen. It might not be before I retire, but one day.
David Farhat (43:52):
Well, as we come towards the end of the episode, one last thing to talk about treasury guidance on these international provisions. Any points there points before we wrap?
Paul Oosterhuis (44:03):
I mean, there are some things that they have to tell us about relatively quickly. Like with the change in the one-month deferral for CFCs a year-end, how are you closing the year and how are you handling the foreign tax credits that accrue at a different time? And there’s some interest in what is a direct expense versus an indirect expense for both FDII purposes and GILTI sub-part of purposes? I think it’s really too bad that when they eliminated expense allocation from GILTI, they didn’t also do it from sub-part F income because that could have simplified things a lot. And as Eric pointed out, the sub-part F income is no longer part of your base for 163J.
(44:49):
So, there’s a policy argument for doing the same thing with expense allocation, within interest allocation in particular, but I don’t think there’s anything treasury department can do about that. Unfortunately, a lot of the changes aren’t going to simplify things in terms of rags and your computer models that you have to have to allocate expenses in some cases and not in others. It just changes the basis of the calculation. But there certainly aren’t as many things that are glitches or are confusing provisions like there were in the 17 Act. It just too bad they couldn’t have cleaned up more of the things from the 17 Act than what they did.
(45:33):
I had somebody asked me about why they didn’t repeal 904 before, which increases the denominator of your 904 fraction in a way that never made sense, and I’m not sure why they didn’t. But it is when you’re in a reconciliation bill, it’s not about just doing good tax policy, it’s about raising revenue. And so, it’s hard for a lot of these things to get included. So, there’s not nearly as much cleanup as we would’ve liked to have seen.
Loren Ponds (46:02):
It’ll have to be piecemeal over the next 20 years. It took that long to get CFC looked through and made permanent.
David Farhat (46:12):
That’s true. Any final thoughts?
Paul Oosterhuis (46:14):
Yeah, I was going to say we should do another one at the beginning of next year. I mean, one final thing that we haven’t talked about that has been an evolution. For a while, our treasury department was talking about trying to get the inclusive framework to finish in October, so that countries could get the legislation enacted by the end of the year. And over the last week or two, I think they’ve been admitting publicly that the inclusive frameworks going to take till the end of the year, and that means countries won’t necessarily have the legislation adopted by the end of the year, unless they automatically incorporate inclusive framework agreements.
(46:54):
And so, unfortunately, that means our multinationals will have to do the running of the numbers and the analytics to figure out what life is like with UTPRs in the first quarter of next year. But you can’t be too critical of our treasury department for that. They’ve got a difficult job and we need to just help them.
David Farhat (47:16):
Well, with that, thank you all for joining us. Once again, this has been GILTI Conscience or NCTI Conscience, however you want to call it nowadays.
Loren Ponds (47:23):
Or NCTI
David Farhat (47:27):
NCTI Conscience. Mama name him GILTI, I’ma call him GILTI.
Paul Oosterhuis (47:28):
Maybe we should change the name to loosen NCTI.
Voiceover (47:34):
Thank you for joining us for today’s episode of GILTI Conscience. If you like what you’re hearing, be sure to subscribe in your favorite podcast app, so you don’t miss any future conversations. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing, transactional planning and controversy challenges. Additional information about Skadden can be found at Skadden.com.
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