The Net CFC Tested Income (NCTI) regime (formerly referred to as the Global Intangible Low‑Taxed Income, or GILTI, regime) generally requires certain U.S. shareholders of controlled foreign corporations (CFCs) to include in current income their pro rata share of a CFC’s NCTI, regardless of whether such income is distributed. This inclusion is intended to subject low‑taxed foreign earnings to a minimum level of U.S. tax.
Recent international tax reforms enacted as part of the One Big Beautiful Bill Act (OBBBA) significantly modify both the calculation and taxation of NCTI and are particularly relevant for U.S. multinational groups with operating CFCs, especially those with material tangible assets or significant U.S.‑level interest or research and experimentation expenses.
Elimination of QBAI and Increase in the NCTI Tax Base
One of the most consequential changes under OBBBA is the elimination of the Qualified Business Asset Investment (QBAI) concept. Under prior law, U.S. shareholders were permitted to reduce their GILTI inclusion by a notional 10% return on a CFC’s tangible depreciable assets. OBBBA removes this reduction entirely. As a result, a greater portion of a CFC’s gross income is now treated as NCTI, increasing the amount included in U.S. taxable income.
This change disproportionately affects asset‑intensive structures, such as manufacturing and distribution CFCs, and materially reduces the prior incentive to locate tangible production assets in low‑tax jurisdictions.
Increase in the Effective NCTI Tax Rate
OBBBA also increases the effective U.S. tax rate applicable to NCTI inclusions from 10.5% to 12.5%. When combined with the repeal of the QBAI reduction, this rate increase further expands potential U.S. tax exposure for CFC shareholders, particularly in structures where foreign effective tax rates are relatively low.
Improved Foreign Tax Credit Utilization
To partially offset the broader NCTI tax base, OBBBA introduces several taxpayer‑favorable changes to the foreign tax credit (FTC) regime applicable to NCTI. First, the legislation eliminates the requirement to allocate certain U.S.‑parent‑level expenses — most notably interest expense and research and experimentation expenses — to NCTI for purposes of computing the FTC limitation. Under prior law, such allocations often reduced foreign‑source income in the GILTI basket and significantly limited FTC availability, even where CFCs paid foreign tax at relatively high effective rates.
By disallowing these indirect expense allocations, OBBBA increases foreign‑source income in the NCTI basket, thereby increasing the FTC limitation and, in many cases, reducing or eliminating residual U.S. tax on NCTI inclusions. In addition, OBBBA increases the creditability of foreign taxes attributable to NCTI from 80% to 90%, further enhancing FTC utilization.
Taken together, these FTC changes may substantially mitigate the impact of the QBAI repeal for taxpayers with higher‑taxed CFCs and significant U.S.‑level expenses. Conversely, taxpayers with low foreign effective tax rates or minimal allocable U.S. expenses may experience an overall increase in U.S. tax liability under the revised regime.
Planning Considerations
In light of these changes, U.S. taxpayers with CFCs should revisit their NCTI modeling and international tax planning strategies. Areas of focus may include reassessing CFC effective tax rates under the enhanced 90% FTC regime, evaluating debt placement and interest expense allocation following the new expense rules, and updating long‑term projections to reflect the permanent repeal of QBAI.
Conclusion
OBBBA represents a meaningful shift in U.S. international tax policy by broadening the NCTI tax base while simultaneously improving FTC utilization. Although the repeal of QBAI and increased tax rate increase potential inclusions, the enhanced FTC rules may significantly reduce residual U.S. tax in many cases. Taxpayers should carefully evaluate the combined effect of these changes to determine their impact under the revised NCTI regime.
READ MORE: GILTI vs. NCTI: How Tax Changes Could Result in a ‘Home Shift’