Our series on the One Big Beautiful Bill Act’s potential impact on U.S.-international supply chains
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), which includes international tax provisions aimed at modifying how U.S. and foreign companies design their global supply chains. A key provision of the bill that carries out this policy objective is the revision of the Global Intangible Low-Taxed Income (GILTI) regime. This article provides a brief background of the GILTI tax and then explains the OBBBA modifications to GILTI that will likely impact global supply chains.
What is GILTI?
Before 2017, the U.S. operated under a worldwide tax system, which taxed U.S. companies on their global income but allowed them to defer U.S. taxes on most foreign, active business profits until those profits were repatriated as dividends. This led many companies to keep the income of controlled foreign corporations (CFCs) offshore to avoid U.S. taxation, while at the same time securing a low effective tax rate. By the beginning of 2017, this situation had resulted in the accumulation of approximately $2.7 trillion in foreign earnings outside of the U.S. tax arm.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which included two provisions to address this massive foreign accumulation of untaxed earnings. The first provision was the so-called “transition tax,” and the second was the Global Intangible Low-Taxed Income tax.
Transition tax
The TCJA transition tax imposed a one-time tax on the approximately $2.7 trillion of previously untaxed CFC earnings that were parked offshore, regardless of whether the funds were brought back to the U.S. This was considered a “deemed repatriation” because it treated the earnings as if they had been repatriated, even if they remained offshore.
GILTI tax
While the transition tax addressed the taxation of CFC accumulated earnings, the GILTI tax was introduced to prevent future accumulation of untaxed profits. This was achieved by focusing on CFC active business income.
For decades, active business income of CFCs had largely remained unaffected by the U.S. anti-deferral rules; however, the GILTI rules dramatically changed the status quo by requiring the inclusion of this active business income in U.S. shareholders’ taxable income, as a deemed dividend.
Fortunately, the GILTI rules included the following provisions that not only mitigated the tax cost of the GILTI income inclusion, but they also incentivized U.S. companies to maintain and expand foreign supply chains. First, U.S. corporate shareholders were granted an automatic 50% deduction on the GILTI deemed dividend, resulting in an effective rate of 10.5% (half of the normal corporate tax rate of 21%). The GILTI rules also allowed U.S. corporate shareholders to take a foreign tax credit for 80% of foreign income and withhold tax paid with respect to the GILTI deemed dividend, which in many cases completely offset the 10.5% GILTI tax.
Second, the GILTI rules charged a notional 10% return on a CFC’s tangible business assets (which the GILTI rules refer to as Qualified Business Asset Investment or QBAI). Along with this, the GILTI rules provided that the GILTI deemed dividend would exclude CFC earnings in an amount equal to the 10% QBAI return. This tax carve-out for CFC earnings attributable to CFC tangible production assets had the effect of dramatically reducing the U.S. tax cost on foreign earnings as U.S. businesses’ foreign production assets increased. Simply put, it incentivized U.S. companies to continue to move manufacturing and other supply chain activities to CFCs as this would reduce CFC earnings subject to the GILTI tax.
The following is a summary of how to calculate a U.S. corporation’s GILTI deemed dividend, including the calculation of the QBAI carve-out. This is followed by a summary of the OBBBA changes to the GILTI rules and the impact this is expected to have on global supply chains.
GILTI deemed dividend calculation example
Determine the tested income
- Calculate the total tested income of the controlled foreign corporation (CFC). Tested income starts with the CFC's gross income, but certain income items are excluded to avoid double taxation or because of some other policy reason. For this example, let's assume the tested income is $200,000.
Calculate the QBAI
- Determine the average of the CFC's aggregate adjusted basis in specified tangible property used in its trade or business. Let's assume the QBAI is $500,000 related to the CFC’s construction of a manufacturing plant.
Multiply the QBAI by 10% to get the QBAI deduction
- QBAI deduction: $500,000 x 10% = $50,000
Calculate the GILTI inclusion amount
- Subtract the QBAI deduction from the tested income to arrive at the GILTI inclusion amount.
- GILTI: $200,000 - $50,000 = $150,000
- So, in this example, the GILTI inclusion amount would be $150,000 after applying the 10% QBAI deduction.
Calculate the U.S. corporate shareholder tax
- $150,000 x 50% (GILTI deduction percentage) = $75,000
- 21% corporate tax rate x $75,000 = $15,750
- Effective tax rate = 7.87%
Renaming GILTI to NCTI and Changes to GILTI Calculation
Under the 2025 OBBBA, Global Intangible Low-Taxed Income (GILTI) has been renamed Net CFC Tested Income (NCTI), and effective Jan. 1, 2026, the following modifications will distinguish the NCTI calculation from the former GILTI calculation:
- The 50% deduction under the GILTI regime has been reduced to 40% under NCTI.
- The GILTI provision involving the favorable exclusion from the GILTI deemed dividend amount for the 10% return on Qualified Business Asset Investment (QBAI) is removed.
Removing the QBAI exemption will result in a dramatic broadening of the CFC revenue base that will be included as GILTI, especially for CFCs with substantial foreign operating assets. This could discourage U.S. companies from shifting factories and equipment to CFCs and is also likely to result in a “home-shift” of such assets. This development aligns with the broader government initiative that strongly encourages U.S. companies to shift more of their supply chain’s capital-intensive profit-making functions back to the U.S.
Future articles will discuss other international tax provisions, some of which partially mitigate the above modifications to GILTI. However, the new NCTI regime, together with the U.S. implementation of global tariffs on foreign produced goods, marks a dramatic intensification of U.S. international tax policy that is driving U.S. companies to shift their supply chains toward the U.S.
This policy gained traction because of the disruption of supply chains during COVID. But the rise in geopolitical tensions with China and Russia have given rise to new U.S. government concerns. As a result, all businesses with international activities should revisit the risks related to their current supply chain structure and should consider aligning it with the recent changes in U.S. tax policy.