S. 1605 — International Competition for American Jobs Act

This section designates the Act as the “International Competition for American Jobs Act” and specifies that its amendments and repeals are to provisions of the Internal Revenue Code of 1986.

This section makes permanent the look-thru rule for controlled foreign corporations (CFCs) (i.e., excluding certain dividends, interest, rents, and royalties received by one CFC from a related CFC from foreign personal holding company income under subpart F, to the extent attributable to the payor CFC's non-subpart F income), applying to taxable years of foreign corporations beginning after December 31, 2025 (previously limited to taxable years before January 1, 2026). (Thus, U.S. shareholders of CFCs with such intercompany payments recognize reduced subpart F inclusions for those taxable years.)

This section modifies the deduction under IRC §250 for domestic corporations by (1) providing a deduction equal to 37.5% of foreign-derived deduction eligible income (FDDEI)—renaming and replacing foreign-derived intangible income (FDII), which was scheduled to decline to 21.875% after 2025—plus 50% of the global intangible low-taxed income (GILTI) amount included in gross income under §951A (and related §78 deemed dividends), (2) limiting apportioned expenses to those directly related to such income, (3) expanding FDDEI to include certain interest payments from a controlled foreign corporation (CFC) to a related U.S. shareholder (with regulatory exceptions for directly related interest expense), (4) excluding the §250 deduction from dividends-received deduction limitations under §246(b)(1), and (5) eliminating the net operating loss adjustment under §172(d)(9). (As background, the §250 deductions reduce the effective U.S. tax rates on FDII/FDDEI—intended to encourage U.S.-based export of intangibles—and GILTI—subpart F income from low-taxed CFCs owned by U.S. shareholders—to 13.125% and 10.5%, respectively, at the 21% corporate rate.) The changes apply to taxable years beginning after December 31, 2025.

This section modifies the base erosion and anti-abuse tax (BEAT) under section 59A—generally a minimum tax at a 10% rate (increasing to 12.5% after 2025) on applicable taxpayers' modified taxable income for base erosion payments to foreign affiliates exceeding 3% (or 2% for certain financial groups) of deductions—for taxable years beginning after December 31, 2025, as follows: (1) revises the BEAT calculation by setting the amount subtracted from the applicable percentage of modified taxable income equal to regular tax liability under section 26(b) (previously, regular tax liability reduced by credits under subparts A-D of part IV of subchapter A) and strikes the related credit provision; (2) allows general business credits under section 38 to offset BEAT liability (in addition to regular tax and alternative minimum tax); (3) eliminates post-2025 modifications to BEAT computations by striking section 59A(b)(2) (which adjusted modified taxable income and applicable percentages under certain conditions) and redesignating (b)(3) as (b)(2), with conforming amendments; and (4) exempts from base erosion payments (A) amounts subject to U.S. tax under chapter 1 (other than BEAT), determined under rules similar to former section 163(j)(5); (B) payments to related foreign parties subject to an effective foreign tax rate (generally per applicable financial statements) of at least 18.9%, with anti-avoidance recharacterization authority; and (C) services costs eligible for the services cost method under section 482 (i.e., routine services not contributing significantly to fundamental business risks). (Thus, these changes narrow BEAT applicability by expanding exclusions from the tax base and adjusting the liability formula and offsets.)

This section eliminates the general category and passive category income baskets for the foreign tax credit limitation under Section 904(d), reducing the number of separate limitation categories from four to two (foreign branch income and global intangible low-taxed income (GILTI)). (As background, the foreign tax credit limits the allowable credit to U.S. tax on foreign-source income, with separate computations by category to prevent cross-crediting excess credits from high-taxed to low-taxed income.) The section also (1) makes conforming amendments, including extending a look-through rule for certain dividends from 2007 to 2026; (2) provides a transition rule for allocating deemed-paid credits under Section 960(c)(2) for pre-2026 categories; and (3) requires domestic corporations to allocate the Section 250(a)(2) deduction (i.e., 50% deduction for GILTI and FDII) and related state taxes to foreign-source GILTI (with other deductions allocated to GILTI only if directly allocable, and otherwise to U.S.-source income). Changes apply to taxable years beginning after December 31, 2025.

This section restores the pre-2017 limitation on downward attribution of stock ownership in IRC §958(b) by excluding stock owned by non-U.S. persons from constructive ownership attribution to U.S. persons under §318(a)(3)(A)-(C) for purposes of controlled foreign corporation (CFC) determinations (i.e., CFCs under Subpart F require >50% ownership by U.S. shareholders of ≥10% each, subjecting them to U.S. income inclusions for certain passive and base erosion income). (Thus, fewer foreign corporations qualify as CFCs due to ownership routed through non-U.S. persons.) It also adds new IRC §951B, which separately applies Subpart F rules (except §§951A, 951(b), and 957) and global intangible low-taxed income (GILTI, §951A) to any "foreign controlled United States shareholder" (i.e., U.S. person treated as >50% owner, using attribution without the new §958(b)(4)) of a "foreign controlled foreign corporation" (i.e., non-CFC that would qualify as a CFC using such shareholders and attribution without §958(b)(4)); directs the Secretary to issue related regulations, including to treat such shareholders and corporations as U.S. shareholders or CFCs for other IRC provisions and to prevent avoidance; and makes a conforming clerical amendment. The amendments apply to the last taxable year of foreign corporations beginning before January 1, 2026, and all subsequent taxable years of such corporations (and corresponding taxable years of U.S. persons), with no inference created as to prior years.

This section establishes a carryover of net controlled foreign corporation (CFC) tested losses—computed as the excess of aggregate CFC tested losses over tested income for a U.S. shareholder under section 951A(c)—to increase tested losses in the succeeding taxable year and offset global intangible low-taxed income (GILTI). (Thus, such carried-over losses are now available indefinitely to reduce future GILTI inclusions, subject to proper adjustments in CFC allocations.) It also treats these carryovers as pre-change losses under section 382, limiting their use following an ownership change. The amendments apply to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of U.S. shareholders in which or with which such taxable years end.

This section expands the triggers for redetermination notices under IRC §905(c) to include (1) a timely change in the taxpayer's election to claim a foreign tax credit or deduction and (2) any other change in the amount or treatment of foreign taxes affecting U.S. tax liability; permits the Secretary to except certain adjustments from adjustment requirements; and strikes "accrued" from the subsection heading. The section further revises IRC §901(a) to allow the election between a foreign tax credit or deduction for any taxable year to be made or changed at any time before expiration of the IRC §6511 refund claim period attributable to such taxes. It also modifies the special limitations period under IRC §6511(d)(3) to apply to changes in liability for foreign taxes paid (or deemed paid under §960), with adjustments to headings and phrasing to reflect additional credits from such changes. (As background, these rules govern the foreign tax credit, which offsets U.S. tax liability for qualifying foreign income taxes to prevent double taxation; redeterminations typically arise from foreign audit adjustments.) The amendments generally apply to taxes paid or accrued in taxable years beginning after December 31, 2025, except those in §905(c)(1) and (3), which apply to changes occurring on or after 60 days after enactment.

This section repeals the 80% limitation on foreign tax credits for global intangible low-taxed income (GILTI) inclusions under Section 960(d)(1), allowing U.S. shareholders to claim credits for 100% of attributable foreign taxes (from 80%). (GILTI requires U.S. shareholders of controlled foreign corporations to include certain foreign business income in gross income currently.) The amendments apply to taxable years of foreign corporations beginning after December 31, 2025, and corresponding taxable years of U.S. shareholders.

This section amends Section 245A of the Internal Revenue Code to establish a new subsection (g) applying the foreign-source dividend deduction (i.e., a 100% deduction generally available to domestic corporations for dividends from specified 10%-owned foreign corporations) to amounts includible in a U.S. shareholder's gross income under section 951(a)(1)(A) (Subpart F inclusions) attributable to the foreign-source portion of non-hybrid dividends received by a controlled foreign corporation from such a foreign corporation, where the domestic corporation is a U.S. shareholder with respect to both. (As background, Section 245A prevents double taxation of repatriated foreign earnings by allowing the deduction for direct dividends to U.S. corporations; this extends equivalent treatment to certain upstreamed dividends via Subpart F.) The amendments apply to distributions made in taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of U.S. shareholders in which or with which such taxable years end.

This section eliminates the inclusion of foreign base company sales income and foreign base company services income in a controlled foreign corporation's (CFC's) Subpart F income by amending IRC §954(a) (i.e., repealing paragraphs (2) and (3) and simplifying paragraph (1) to include only foreign personal holding company income). (As background, Subpart F requires U.S. shareholders of CFCs to include certain types of income—intended to capture mobile income easily shifted offshore—in their U.S. taxable income on a current basis to limit tax deferral; foreign base company sales income generally includes certain sales income involving related persons, and foreign base company services income includes certain income from services performed for related persons, outside the CFC's country of incorporation.) It further (1) revises the definition of related person in §954(d) to mean a person controlled by (or controlling) the CFC or controlled by the same persons controlling the CFC, with "control" defined as direct or indirect ownership of more than 50% of voting power or value (or beneficial interests), (2) strikes §954(e) and (g), and (3) makes conforming amendments throughout the Internal Revenue Code updating cross-references to §954(d). (Thus, after the effective date, U.S. CFC shareholders generally will not include such sales and services income as Subpart F income.) The amendments apply to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of U.S. shareholders with or within which such taxable years end.

This section exempts corporate United States shareholders from the Subpart F inclusion under Section 956 for investments in United States property by controlled foreign corporations. (As background, Section 956 generally requires U.S. shareholders of controlled foreign corporations to include in income their pro rata share of the corporation's U.S. property holdings, such as loans to related U.S. persons, treated as a deemed dividend.) The amendment applies to taxable years of controlled foreign corporations ending after December 31, 2025, and taxable years of United States shareholders with or within which such taxable years end.

This section revises the criteria under IRC §901 for determining whether a foreign tax qualifies as an income tax eligible for the foreign tax credit (FTC), treating such a tax as an income tax if its predominant character is that of an income tax. The section further directs that these determinations, and those under §903 (taxes in lieu of income taxes), disregard any nexus requirement between the tax base and the taxing jurisdiction, for taxable years beginning after December 31, 2025. (Thus, the change broadens the range of potentially creditable foreign taxes available to U.S. taxpayers to offset U.S. tax on foreign-source income.)

This section establishes new IRC §966 with special rules for distributions of intangible property—defined as property described in §367(d)(4) (i.e., patents, copyrights, etc.) or computer software under §197(e)(3)(B)—held by a controlled foreign corporation (CFC) on the date of enactment from the CFC to a domestic corporate United States shareholder (i.e., a 10%+ U.S. shareholder), if made before the last day of the CFC's third taxable year beginning after December 31, 2025. For such distributions, (1) the property's fair market value is treated as not exceeding its adjusted basis immediately before the distribution for purposes of corporate distribution rules under part I of subchapter C and other provisions specified by the Secretary (thus, generally preventing recognition of built-in gain on appreciated intangibles), and (2) if the distribution is not a dividend, the U.S. shareholder's basis in the CFC stock increases by any amount otherwise includible in gross income, with a corresponding reduction in the distributed property's basis. The section makes conforming amendments to §197(f)(2) (anti-churning rules for acquired intangibles) and the table of sections for Subpart F, and applies to distributions in taxable years of foreign corporations beginning after December 31, 2025 (and corresponding U.S. shareholder taxable years).

This section excludes qualified Virgin Islands services income from gross tested income in calculating global intangible low-taxed income (GILTI) for specified United States shareholders of controlled foreign corporations (CFCs). (As background, GILTI under IRC §951A requires U.S. shareholders to include in income their pro rata share of a CFC's tested income exceeding a routine return on tangible assets, thus subjecting certain foreign business income to U.S. tax.) Qualified Virgin Islands services income is gross income from labor or personal services performed in the Virgin Islands by a corporation formed under Virgin Islands law, attributable to services performed there by individuals for the corporation's benefit, and effectively connected with a Virgin Islands trade or business. A specified United States shareholder is (1) an individual, trust, or estate or (2) a closely held C corporation that acquired its direct or indirect interest in the CFC before December 31, 2023. The amendments apply to taxable years of foreign corporations beginning after enactment and corresponding taxable years of U.S. shareholders, with regulations required to prevent abuse.