Understand the American Tax Reform (TCJA and OBBBA), the corporate tax cut to 21%, individual changes, and the impact on international business.

Executive Summary

The fiscal landscape of the United States has undergone radical transformations over the last decade, primarily marked by the Tax Cuts and Jobs Act (TCJA) of 2017 and consolidated by the One Big Beautiful Bill Act (OBBBA) of 2025. The most emblematic change was the reduction of the corporate income tax rate from 35% to 21%, aimed at increasing global competitiveness and attracting investment. For corporations, the system shifted from worldwide taxation to a territorial model, introducing complexities such as GILTI (renamed NCTI) and BEAT to protect the tax base. On the individual level, standard deductions nearly doubled, while child tax credits were significantly expanded. However, these tax reliefs resulted in a significant increase in federal public debt, with estimates suggesting that extending these measures could add trillions to the American deficit over the next ten years.

What happened during the American Tax Reform?

The 2017 reform, signed into law by Donald Trump, was the largest restructuring of the U.S. tax system since 1986. The central goal was to simplify the tax code and stimulate economic growth through deep tax cuts. In 2025, the One Big Beautiful Bill Act (OBBBA) permanently extended most of these provisions that were set to expire, while also introducing new exemptions for qualified overtime and tip income.

1. The Historic Reduction of Corporate Tax to 21%

The most impactful change was the replacement of a graduated rate structure that reached 35% with a flat rate of 21%.

• Before the Reform: American companies faced one of the highest nominal tax rates in the world, which created a competitive disadvantage.
• After the Reform: The U.S. became a more attractive destination for foreign capital, with a tax burden below the OECD average at the time.

This measure aimed not only at competitiveness but also at discouraging "tax inversions," where companies moved their headquarters abroad to pay lower taxes.

2. The One Big Beautiful Bill Act (OBBBA) of 2025

While the 2017 TCJA had many temporary provisions for individuals, the 2025 OBBBA, signed on July 4, made these cuts permanent.

• Permanence: Reduced individual income tax rates were locked in, avoiding the massive increase scheduled for the end of 2025.
• New Features: The OBBBA included deductions for qualified tips and overtime, and created "Trump Accounts" for deferred childhood savings.
• Funding: Part of the cuts was offset by significant spending reductions in Medicaid (approximately 12%) and the SNAP food assistance program.

3. Structural Changes for Individuals

For the average citizen, the reform altered the way tax liability is calculated through three pillars:

• Standard Deduction: Nearly doubled, rising to 12,000∗∗forsinglesand∗∗24,000 for couples (2018 base values), reducing the number of people who need to itemize.
• Personal Exemptions: These were permanently eliminated in exchange for the increased standard deduction.
• Child Tax Credit (CTC): Doubled from 1,000to∗∗2,000** per child, with the refundable portion increased and the income phase-out range substantially expanded.

4. Rate Comparison: Before vs. After (TCJA)

Below are the income tax brackets for married filers (2018) under the TCJA:

5. 20% Deduction for Pass-Through Entities (Section 199A)

Small businesses and professionals organized as partnerships or S corporations gained a crucial benefit: a deduction of up to 20% of qualified business income (QBI). This effectively reduces the maximum effective rate for these entities from 37% to approximately 29.6%. The 2025 OBBBA made this provision permanent, providing long-term relief for the small business sector, which represents nearly half of U.S. private employment.

6. The End of Worldwide Taxation: The Territorial System

Prior to the reform, the U.S. taxed the worldwide profits of its multinationals, allowing only a credit for taxes paid abroad upon repatriation.

• New Model: A 100% dividends-received deduction was introduced for foreign-source dividends from subsidiaries where the U.S. parent has at least a 10% stake.
• Transition Tax: To transition to this new system, a one-time "deemed repatriation tax" was applied to accumulated offshore earnings: 15.5% on cash and 8% on illiquid assets.

7. Anti-Abuse Rules: GILTI/NCTI and BEAT

To prevent the territorial system from incentivizing profit shifting to tax havens, protective layers were created:

• GILTI (now NCTI): Targets profits from foreign subsidiaries that exceed a 10% return on tangible assets, focusing on income derived from intellectual property (IP). The OBBBA renamed it Net CFC Tested Income and set the effective rate at 12.6%.
• BEAT (Base Erosion Anti-Abuse Tax): An alternative minimum tax designed to prevent companies from making excessive deductible payments (interest, royalties) to foreign affiliates to erode their U.S. tax base. The OBBBA permanently set this rate at 10.5%.

8. Economic Impacts: Debt and Growth

While proponents argue that the reform would pay for itself through growth, reality shows a significant increase in debt.

• Public Debt: The TCJA was estimated to add 1.9trillion∗∗tothedebtovertenyearsafteraccountingformacroeconomicfeedback.TheextensionbytheOBBBAcouldaddanother∗∗3 trillion to the federal debt.
• GDP Growth: The initial impact was stimulative, with real GDP being 2.5% higher at the end of 2019 than projected before the reform.
• Investment: There was an estimated 11% increase in corporate investment following the TCJA implementation.

9. What changes for Brazilian Companies?

The U.S. reform directly affects Brazilian groups with U.S. operations and vice versa:

• Lower Tax Credit: Since Brazil taxes universal profits at 34%, Brazilian companies with U.S. subsidiaries (now paying 21%) will have less credit to offset in Brazil, resulting in higher complementary tax payable to the Brazilian revenue service.
• Hybrid Mismatch Rule: Payments such as Interest on Equity (JCP) may be considered hybrid instruments, potentially leading to the denial of their deductibility in the U.S..
• Competitiveness: The reduced U.S. burden may incentivize Brazilian multinationals to relocate intangible assets or production plants to the U.S. due to the lower combined tax load.

10. Limitation of Interest and Tax Losses

To help fund the tax cuts, the law tightened deduction rules for businesses:

• Interest Deduction: Limited to 30% of EBITDA (and later just EBIT), forcing leveraged companies to review their capital structures. The OBBBA permanently restored the EBITDA-based limit.
• Net Operating Losses (NOL): Now limited to offsetting only 80% of taxable income for losses arising after 2017, and the ability to "carry back" losses to previous years was generally eliminated.

11. Impacts on Health and Well-being

The tax reform was also used as a vehicle for profound social changes:

• ACA Individual Mandate: The penalty for not having health insurance was reduced to zero, weakening the Affordable Care Act (Obamacare). The CBO projects this will result in millions of fewer people having insurance coverage.
• Social Cuts: The 2025 OBBBA made significant cuts to Medicaid funding, which researchers warn could lead to thousands of preventable deaths annually due to loss of coverage.

12. Practical Example: Corporate Tax Calculation (2026)

Imagine a company (C Corporation) with the following data under OBBBA rules:

• Gross Revenue: $1,000,000
• Cost of Goods Sold (COGS): ($400,000)
• Gross Profit: $600,000
• Operating Expenses: ($300,000)
• Depreciation (100% bonus on new equipment): ($50,000)
• Research & Development (R&E immediately expensed): ($40,000)
• Business Interest (within the 30% limit): ($20,000)
• Taxable Income: $190,000
• Federal Income Tax (21%): $39,900

Under the law prior to 2025, taxable income would have been much higher due to slower depreciation and mandatory 5-year amortization of R&E costs.

13. What should companies do now?

1. Update Tax Models: Old structures for transfer pricing and cost-sharing should be reviewed in light of NCTI (GILTI) and BEAT.
2. Reevaluate Capital Structure: With stricter interest limits, it may make sense to deleverage or seek financing outside the U.S..
3. Manage Compliance Growth: The amount of information required in tax returns has nearly tripled, necessitating new systems and processes.

FAQ: Frequently Asked Questions

1. Is the 21% corporate rate permanent? Yes, both the TCJA and the OBBBA established the corporate rate as permanent (no expiration date), though future legislation could change it.

2. What is the OBBBA tip exemption? The 2025 OBBBA introduced a federal deduction allowing workers in certain occupations (like servers and drivers) to pay no income tax on up to $25,000 of qualified tips annually.

3. How does the OBBBA affect state tax deductions (SALT)? The $10,000 cap on state and local tax deductions introduced in 2017 was maintained, but the OBBBA increased this limit for married filers to approximately $20,000 in specific cases.

4. What happened to Research and Development (R&D) costs? The OBBBA restored immediate expensing for domestic research and experimentation costs, reversing the mandatory 5-year amortization rule that had briefly taken effect.

5. What is the impact of the reform on U.S. debt? Analysts and the CBO indicate that without equivalent spending cuts, the reform will add trillions to the national debt, raising concerns about inflation and long-term fiscal stability.

Conclusion

The American Tax Reform represents a paradigm shift for the world’s largest economy, prioritizing domestic investment and "Made in USA" production. For companies, the focus has moved from tax deferral to real economic substance. Internationally, the lesson is clear: countries are in a race for tax competitiveness, and failing to adapt to these global standards can cost investment and jobs.

Internal Link Suggestions:

• How to open a subsidiary in the U.S.
• International tax planning for multinationals.
• Guide to Pass-Through entities and Form 1065.

External Link Suggestions:

• IRS - Form 1120 Guide
• Tax Foundation - OBBBA Analysis
• CBO - Federal Budget Outlook