The U.S. Treasury Department and IRS recently issued proposed regulations (REG-117273-25) providing guidance on significant changes made by the One Big Beautiful Bill Act (“OBBBA”) to the expense allocation rules applicable to Section 951A income, historically known as Global Intangible Low-Taxed Income (“GILTI”).

Beginning in 2026, OBBBA modifies the Section 951A regime, including replacing the former GILTI computation with Net CFC Tested Income (“NCTI”). For simplicity, this newsletter refers to the regime as the Section 951A/GILTI regime.

New Expense Allocation Rules

One of the significant changes under OBBBA involves how U.S.-level expenses are allocated to foreign-source Section 951A income.

Under the new rules, interest expense and research and experimental (“R&E”) expenditures are no longer allocated or apportioned to foreign-source Section 951A income.

The proposed regulations further provide that several other common U.S. corporate expenses generally are not considered directly allocable to Section 951A income, including:

· Stewardship expenses;

· Legal and accounting fees and expenses;

· General and administrative, overhead, supervisory, and other supportive expenses; and

· Certain damages, settlement payments, and related expenses.

Instead, deductions that otherwise would have been allocated to foreign-source Section 951A income are generally allocated to U.S.-source income.

Why This Change Matters

Under the prior rules, U.S.-level expenses such as interest, R&E, stewardship, and general and administrative expenses could be allocated against foreign-source Section 951A income.

Beginning in 2026, the new law significantly limits the expenses that may be allocated to Section 951A income. Generally, expenses other than those specifically identified by statute may be allocated to Section 951A income only when they are directly allocable to that income.

Accordingly, U.S. corporations with CFCs should revisit their existing expense allocation methodologies for 2026 and later taxable years.

Related Section 250 Changes

The proposed regulations also address changes to the Section 250 deduction for Foreign-Derived Deduction Eligible Income (“FDDEI”).

For taxable years beginning after December 31, 2025, interest expense and R&E expenditures generally are excluded from the expenses and deductions used in determining DEI and FDDEI.

Accordingly, interest expense and R&E expenditures generally will not reduce DEI or FDDEI under the new rules.

Effective Date

If finalized as proposed, the regulations would generally apply to taxable years beginning after December 31, 2025. Taxpayers may rely on the proposed regulations before they are finalized, provided that the taxpayer and its related parties apply the proposed regulations in their entirety.