The 2025 Tax Debate: GILTI, FDII, and BEAT Under the Tax Cuts and Jobs Act

In 2025, federal lawmakers will confront major tax policy expirations, the majority of which stem from the Tax Cuts and Jobs Act (TCJA) of 2017—the most significant federal tax code overhaul in decades.

TCJA’s changes to international business taxes are projected to raise revenue (and reduce deficits) by $324 billion from FY2018-2027.[1]

BEAT

Revenue Effects at Enactment, FY2018-2027 (Joint Committee on Taxation, JCT): +$150 billion
Revenue Effects if Lower Rates Made Permanent, FY2025-2034 (JCT): -$35 billion

Policy Change

TCJA levies a new minimum tax—the Base Erosion and Anti-Abuse Tax, or BEAT—on large companies that meet a certain threshold for deductible interest payments made to foreign affiliates or subsidiaries (described in further detail below). The BEAT rate functions as a backstop of sorts, a minimum tax to ensure companies cannot reduce their U.S. tax liability too much by booking debt (and deductible interest payments) in the U.S. Unlike some other parts of TCJA’s international tax reform, it applies to companies headquartered in the U.S. and to companies headquartered in other countries but doing business in the U.S.

The minimum rate is 10% of taxable income, with so-called “base erosion payments” that would normally be deducted added back in to the tax base. The rate rises to 12.5% in 2026.

BEAT applies to companies with 1) average annual gross receipts of $500 million or greater in the past three tax years, and 2) more than 3% of their overall deductions being attributable to payments to foreign affiliates and subsidiaries (i.e., outbound payments).

Context

As part of the move from a mostly worldwide to a mostly territorial system under TCJA, lawmakers wanted to ensure that the U.S. retained an ability to tax foreign earnings that are most likely to be derived from tax-motivated profit shifting. The two primary methods by which companies may shift profits from the U.S. to foreign countries are debt (i.e., making interest payments from the U.S. to a foreign affiliate or subsidiary in a lower-tax country) and transfer of assets between related companies (i.e., booking deductible expenses for the asset in the U.S. and the related income/earnings from the asset at a foreign affiliate or subsidiary in a lower-tax country).

BEAT addresses the debt method of profit shifting (and other, non-debt payments made between related businesses), while GILTI and FDII (more below) address the transfer-pricing method.

Rationale

Although House Republicans conceived of a different type of penalty than Senate Republicans (the former proposed an excise tax on these payments, the latter a minimum tax that became BEAT), the rationale for either proposal is similar. House Republicans write, of their excise tax proposal:

“…rather than implementing a provision to combat perceived transfer pricing abuses, the Committee instead seeks to address the mismatch created by the reduction to U.S. taxable income via outbound, related-party payments and the recognition of foreign income that is attributable to those payments and never subject to U.S. tax.”

Democrats have criticized BEAT, claiming it penalizes low-profit businesses relative to high-profit businesses (as the high-profit ones are already paying more tax, in general) and doesn’t distinguish outbound payments  going to high-tax countries versus low-tax countries. The Biden administration proposed replacing BEAT with a Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule that would disallow deductions that U.S. companies make to foreign affiliates or subsidiaries in low-tax countries.

Impact

According to 2018 data from the IRS, 479 companies paid $1.8 billion in the BEAT in 2018. JCT has noted that far fewer companies paid the BEAT than companies that included GILTI in their tax returns (6,325) or claimed the FDII deduction (6,198). JCT has also reported that revenues raised from the BEAT remained stuck at around $2 billion in 2019 and 2020. The non-partisan Penn Wharton Budget Model (PWBM) notes that “[m]ultinationals have responded to BEAT by moving away from the types of transactions targeted by the tax.”

GILTI

Revenue Effects at Enactment, FY2018-2027 (JCT): +$112 billion
Revenue Effects if Lower Rates Made Permanent, FY2025-2034 (JCT): -$143 billion (combined with FDII score, see below)

Policy Change

TCJA requires domestic companies to include in their taxable income Global Intangible Low-Taxed Income, or GILTI.

GILTI is defined as income earned by Controlled Foreign Corporations  that is not already taxed under separate rules (e.g., subpart F). Companies may carve out of their GILTI tax liability 10% of the value of certain tangible assets; this carveout is known as qualified business asset investment, or QBAI. This carveout helps ensure that GILTI targets income from highly mobile, highly profitable intangible assets.

The tax rate on GILTI is 10.5%, achieved by allowing a 50% deduction from the statutory corporate tax rate of 21% (21% – (21% * 0.5)). Taxes paid in other countries on GILTI can offset up to 80% of GILTI liability, meaning that some income under GILTI may effectively be taxed twice. Any unused GILTI foreign tax credits cannot be carried forward or back. For companies operating in multiple countries, GILTI income or losses may be blended with each other on a global basis, but any overall GILTI losses cannot be carried back or forward to other years. Domestic losses can impact a company’s ability to claim GILTI deductions, and long-standing expense allocation rules can affect a company’s FTCs claimed against GILTI tax liability.

The tax rate on GILTI is scheduled to rise in 2026, from 10.5% to 13.125%, since the deduction on GILTI will decline from 50% to 37.5% (21% – (21% * 0.375)).

Context

GILTI is arguably the most well-known of the anti-abuse rules created by TCJA. Just as the BEAT is intended to disincentivize profit shifting through debt, GILTI is intended to disincentivize profit shifting through transfer pricing by ensuring the most profitable foreign activities of U.S.-based companies are subject to a minimum tax rate.

Before TCJA, long-standing rules of the U.S. tax code similarly sought to ensure foreign profits on passive income from investments were subject to U.S. tax. These rules were called subpart F. The difference between GILTI and subpart F is most succinctly described by Joshua Ashman and Nathan Mintz of The Tax Adviser:

“There is a fundamental difference between the definitions of Subpart F income and GILTI: Subpart F income is defined initially by what it includes, and GILTI is defined initially by what it excludes.”

GILTI excludes a return from tangible assets, as noted above—an effort by policymakers to isolate GILTI taxes to the high profits that companies derive from holding intangible assets overseas. Subpart F is defined by what it includes, which is most types of passive income. The subpart F rules are still in effect and co-exist with GILTI today.

Rationale

In creating GILTI, Republicans sought to modernize the rules for taxing intangible, mobile, and highly profitable assets held abroad by U.S. companies without creating a regime that punishes companies simply for having a presence in foreign countries. They also sought to hedge against the risks that moving from a worldwide to a territorial system would incentivize, rather than disincentivize, investment abroad in low-tax countries at the expense of the U.S.

As they explained further:

“…The Committee does not believe the concentration of high returns abroad by itself is a sufficient indicium of erosion of the U.S. tax base. Where those returns are subject to a low effective tax rate that achieves significant tax savings, however, the Committee believes base erosion may have been a consideration and that U.S. taxation is appropriate.”

Skeptics of the GILTI regime have generally advocated for a rate higher than 10.5% and for additional changes that would increase the GILTI tax liability for U.S.-based companies. For example, the Biden administration has proposed a) raising the GILTI rate to 21%, b) eliminating the QBAI carveout, and c) ending the ability for companies to blend their GILTI income and losses and instead requiring separate country-by-country calculations of tax liability. Other Democratic policymakers have proposed different reforms.

Impact

According to JCT, in 2020, approximately 0.1% of U.S. corporations (6,815 out of 6.4 million) reported a GILTI inclusion on their tax return. The proportion was much higher (12%) for corporations reporting more than $1 billion in assets.

GILTI has, directly and indirectly, inspired similar rules in other countries. These rules allow other countries to compel their domestic companies to pay a minimum rate on foreign earnings, and they tie into the global tax project and agreement discussed in further detail below.

FDII

Revenue Effects at Enactment, FY2018-2027 (JCT): -$64 billion
Revenue Effects if Lower Rates Made Permanent, FY2025-2034 (JCT): -$143 billion (combined with GILTI score, see above)

Policy Change

TCJA allows domestic companies to effectively pay a lower tax rate on export income that is derived from certain U.S.-based assets, called Foreign-Derived Intangible Income (FDII). By permitting a 37.5% deduction on the taxes levied on FDII, companies pay an effective 13.125% tax rate instead of the 21% rate (21% – (21% * 0.375)).

In 2026, the value of the deduction decreases, meaning the effective tax rate on FDII increases. The deduction amount will be reduced to 21.875%, leading to an effective rate on FDII of 16.406% (21% – (21% * 0.21875)).

Context

It may be useful to think of FDII as the carrot to GILTI’s stick. GILTI is, in theory, a disincentive for domestic companies to keep valuable assets abroad, by levying a minimum tax on the profits those assets produce. FDII is, in theory, an incentive for domestic companies to bring assets back to the U.S. (or keep them here) by reducing the tax rate charged on a portion of the profits generated by those assets.

Rationale

JCT has noted that the intent of FDII is to “[encourage] U.S. companies to own valuable intangible assets and earn intangible income in the United States, rather than in low- or zero-tax jurisdictions” (emphasis ours).

Republicans say FDII “ensures that American companies are encouraged to invest their profits here at home, creating jobs and developing new technologies that grow our economy.”

The deduction has won some bipartisan support. Pre-TCJA, prominent Democrats including Ways and Means Committee Ranking Member Richard Neal (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) proposed reduced rates on income derived from U.S.-based intangible assets, close cousins to what became the FDII deduction. However, the Biden administration and some Democrats do not support it. The Biden administration argues FDII rewards large incumbents rather than “new domestic investment” and exporters over “domestic producers,” and has proposed replacing FDII with unspecified investments “to encourage R&D.”

Impact

IRS data indicate that in 2018, a little over 3,900 corporate tax returns claimed FDII deductions worth $52.5 billion. JCT reports the value of FDII deductions increased to $66.7 billion in 2020. Research by PWBM similarly indicates the value of FDII for American companies has increased over time.

It may take years for researchers to determine FDII’s impact on the U.S. economy—including job creation, investment, and location of assets—but early research suggests both FDII and GILTI have increased the incentive for domestic companies to locate new investments in the U.S.

Conclusion

International tax policy is one of the most complex areas of tax policy writ large. This analysis offers a broad overview of the pre-TCJA system, how TCJA changed international tax policy, and how TCJA policy fits in with the tax agreement being negotiated at the global level.

Given the scheduled changes to GILTI, FDII, and BEAT rates, and the 2026 deadline for GILTI to align with Pillar Two, international tax reform will, without a doubt, be on lawmakers’ agenda again during the 2025 tax reform debate.

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[1] For revenue estimates, we reference the Joint Committee on Taxation’s (JCT) December 2017 report, “Estimated Budget Effects Of The Conference Agreement For H.R.1, The Tax Cuts And Jobs Act.”