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The law reduces the FDII deduction from 37.5% to 33.34%, which increases the federal effective tax rate from 13.125% to approximately 14%. The law also reduces GILTI deduction from 50% to 40% and increases certain deemed-paid foreign taxes from 80% to 90%, which, when combined, increases the Crossover Rate from 13.125% to approximately 14%.
The law reduces expenses apportioned to FDII and GILTI for purposes of the foreign tax credit (FTC) limitation and the amount of the FDII deduction, respectively. Further, interest and R&D expenses are no longer approtioned to FDII or GILTI, which can reduce the federal effective tax rate on FDII to below 14% (perhaps significantly so). The law also modifies the headings of the FDII and GILTI provisions and, correspondingly, the acronyms by which these regimes are known. FDII becomes "foreign-derived deduction eligible income" (FDDEI); GILTI becomes "net CFC tested income" (NCTI); For ease of discussion, this Alert uses the original acronyms.