Here’s what HIVE AI had to say about “How does the bill impact foreign investors and cross-border tax rules, including new penalty taxes under the One Big Beautiful Bill?”:
Impact of the One Big Beautiful Bill Act on Foreign Investors and Cross-Border Tax Rules
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces significant changes to international tax policy that substantially affect foreign investors and cross-border tax rules. These modifications represent a comprehensive restructuring of America’s international tax framework, with particular emphasis on penalty enforcement and compliance mechanisms.
Restructuring of International Tax Framework
The law restructures the tax on global intangible low-taxed income (GILTI) and the deduction for foreign-derived intangible income (FDII) by repealing the deduction for qualified business asset investment (QBAI). Repealing QBAI effectively raises taxes on physical capital deployed abroad by US firms, while lowering taxes on capital in the US used for exports. 1 This fundamental change creates a more pronounced distinction between domestic and foreign investment activities, potentially discouraging foreign capital deployment by U.S. multinational corporations.
The OBBBA makes many permanent changes to international tax policy, notably by canceling the larger scheduled tax increases built into the tax code in 2026 and keeping the effective tax rates on international income closer to current policy values. 1 This permanence provides long-term certainty for international tax planning, though it comes with increased compliance burdens and penalty structures.
Enhanced Penalty Framework for International Compliance
The OBBBA significantly strengthens penalty mechanisms for international tax compliance failures. Failure to comply with the provisions of this section subjects the taxpayer to the penalty provisions of section 6689 and § 301.6689-1 of this chapter. 2 These penalties apply broadly to foreign tax credit redetermination requirements and related compliance obligations.
The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file. 3 However, the enforcement mechanisms have been substantially enhanced under the new legislation. The Act introduces more stringent reporting requirements for multinational enterprises, with these regulations will only affect U.S. corporations, partnerships, and business trusts that have foreign operations with respect to a taxable year when the combined annual revenue of the business entities owned by the U.S. person meets or exceeds $850,000,000 for the previous reporting period. 3
Foreign Tax Credit Modifications and Limitations
The OBBBA introduces significant modifications to foreign tax credit rules that directly impact foreign investors and cross-border transactions. This includes adjustments to expense allocation, a partial fix to the foreign tax credit haircut, and making the “look through” tax rule permanent policy. 1 These changes provide some relief from previous restrictions while maintaining anti-abuse measures.
Section 1.1411-1(e), Income Tax Regs., specifically addresses the issue of a foreign tax credit against the net investment income tax and explains that the Code does not provide a foreign tax credit against the section 1411 tax, stating: Amounts that may be credited against only the tax imposed by Chapter 1 of the Code may not be credited against the section 1411 tax imposed by Chapter 2A of the Code unless specifically provided in the Code. For example, the foreign income, war profits, and excess profits taxes that are allowed as a foreign tax credit by section 27(a), section 642(a), and section 901, respectively, are not allowed as a credit against the section 1411 tax. 4
New Penalty Taxes and Enforcement Mechanisms
The legislation introduces several new penalty taxes that specifically target foreign investment structures and cross-border arrangements. Overseas Remittances – Section 70604: Imposes a 1% tax on all remittances sent overseas, affecting U.S. taxpayers who send funds to family members and other individuals overseas. This represents a significant new burden on cross-border financial flows and could substantially impact foreign investors with U.S. connections.
Any person who enters, introduces, facilitates, or attempts to introduce an article into the United States using the privilege of this section, the importation of which violates any other provision of United States customs law, shall be assessed, in addition to any other penalty permitted by law, a civil penalty of up to $5,000 for the first violation and up to $10,000 for each subsequent violation. 5 While this provision specifically addresses customs violations, it demonstrates the broader trend toward enhanced penalty enforcement in cross-border contexts.
Impact on Controlled Foreign Corporation Rules
The OBBBA makes substantial modifications to Controlled Foreign Corporation (CFC) rules that affect foreign investors and their U.S. operations. If a foreign corporation is a controlled foreign corporation at any time during a taxable year of the foreign corporation (in this subsection referred to as the ‘CFC year’)— each United States shareholder which owns (within the meaning of section 958(a)) stock in such corporation on any day during the CFC year shall include in gross income such shareholder’s pro rata share (determined under paragraph (2)) of the corporation’s subpart F income for the CFC year. A United States shareholder’s pro rata share of a controlled foreign corporation’s subpart F income for a CFC year shall be the portion of such income which is attributable to the stock of such corporation owned (within the meaning of section 958(a)) by such shareholder. 6
These modifications create more precise attribution rules but also increase compliance complexity for foreign investors with U.S. shareholders or subsidiaries.
Business Interest Limitation Adjustments
The amounts included in gross income under sections 951(a), 951A(a), and 78 (and the portion of the deductions allowed under sections 245A(a) (by reason of section 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions) 7 are now included in the calculation of adjusted taxable income for business interest limitation purposes. This change affects foreign investors’ ability to deduct interest expenses related to their U.S. operations and investments.
OECD Compliance and International Coordination
As part of the process, the administration also successfully negotiated the US international tax system to be acknowledged as compliant with the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two minimum tax rules, preventing the inclusion of retaliatory tax rules in OBBBA that would have harmed foreign investment. 1 This coordination helps prevent double taxation scenarios but also ensures that foreign investors cannot escape minimum tax obligations through jurisdictional arbitrage.
Passive Foreign Investment Company (PFIC) Implications
The enhanced penalty framework extends to PFIC regulations, where This reduction in the pool of non-PFIC investment opportunities can be expected to lower the after-tax return to U.S. investors relative to the no-action baseline. To the extent that investors retain their investments in companies that have been determined to be PFICs or turn to domestic investments, U.S. tax revenue may rise relative to the no-action baseline. 8 Foreign investors must carefully navigate these rules to avoid punitive tax treatment on their U.S. investment activities.
The One Big Beautiful Bill Act represents a fundamental shift in how the United States approaches international taxation, with enhanced penalty mechanisms serving as a primary enforcement tool. Foreign investors must adapt their compliance strategies to address these new requirements while taking advantage of the certainty provided by the permanent nature of many provisions. The legislation’s emphasis on penalty enforcement, combined with its coordination with international tax frameworks, creates a more complex but potentially more predictable environment for cross-border investment and business operations.
Sources
1 Tax Foundation
2 Treasury Regulation 1.905-4
3 T.D. 9773
4 Dawson U.S. Tax Court Opinions Catherine S. Toulouse
5 One Big Beautiful Bill Act Sec. 70531. Modifications to de minimis entry privilege for commercial shipments
6 One Big Beautiful Bill Act Sec. 70354. Modifications to pro rata share rules
7 One Big Beautiful Bill Act Sec. 70342. Definition of adjusted taxable income for business interest limitation
8 T.D. 9936
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