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Cross-border Tax Talks
October 07, 2026
A regulatory balancing act: Recent US guidance
Doug McHoney (PwC’s International Tax Services Global Leader) is joined by Wade Sutton, International Tax Leader of PwC’s Washington National Tax Services practice and guest host of Cross-border Tax Talks. After Wade reflects on his previous experience at the US Treasury Department, he and Doug discuss four proposed regulation packages under the One Big Beautiful Bill Act (OB3): expense allocation for net CFC tested income (NCTI) and foreign-derived deduction-eligible income (FDDEI), FDDEI eligibility changes, CFC pro rata share rules, and repeal of the one-month deferral election. They examine foreign tax credit limitations, overall domestic loss exposure, M&A drafting and tax-year elections, and transition relief. The conversation also covers reconciliation prospects, regulatory comment periods, Loper Bright’s influence on Treasury’s approach, and anticipated guidance on foreign sales branches and foreign-controlled CFCs.
- [01:25] – What changes when Wade moves from podcast guest to host?
- [04:10] – Could the midterm elections lead to a year-end reconciliation bill?
- [06:45] – How does OB3 change expense allocation for NCTI and FDDEI?
- [08:00] – Why expense allocation can limit foreign tax credits.
- [10:15] – How narrower expense allocation moves NCTI toward a minimum-tax model.
- [12:05] – Why stewardship is excluded while currency losses on NCTI PTEP remain allocable.
- [14:05] – Why R&E differs from interest, and how overall domestic losses can restore top-up tax.
- [15:40] – FDDEI expense allocation, capitalized R&E, and contract research questions.
- [17:05] – What other FDDEI eligibility changes do the proposed regulations address? Removing the tangible-asset reduction and excluding offshore IP sales.
- [18:05] – Depreciable property, inventory, and the treatment of refurbished assets.
- [19:25] – How domestic losses can reduce the FDDEI deduction.
- [21:30] – How do the CFC pro rata share rules replace the ‘hot potato’ approach?
- [24:15] – Eliminating the prior-owner dividend reduction and last-day ownership rules.
- [25:45] – Daily proration and the importance of M&A drafting.
- [27:55] – PTEP stock-basis timing and potential double taxation for sellers.
- [29:10] – Spin-offs, unchanged CFC ownership, and income in the second short taxable year; elective CFC tax-year closings and ownership-change thresholds.
- [30:48] – Mandatory tax-year closings when CFC status changes.
- [31:35] – What does repeal of the CFC one-month deferral rule mean; the short-year transition and the risk of losing foreign tax credits.
- [34:15] – Category-specific tax allocation, partnership timing, and the no-allocation election.
- [35:50] – Different effective dates, comment periods, and the path to final regulations; finalization push under the retroactivity rule.
- [37:05] – How is Loper Bright influencing Treasury’s interpretation of OB3?
- [39:35] – Which OB3 guidance packages are next on Wade’s watchlist:
- foreign sales branch sourcing and the 50% cap;
- section 951B, foreign-controlled CFCs, and implications for inbound groups.
Speakers
International Tax Services Global Leader, PwC US
Wade Sutton
Washington National Tax Services International Tax Leader, PwC US
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