The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, introduces the most consequential shift in U.S. international tax rules since the Tax Cuts and Jobs Act of 2017 (TCJA). Among its most significant changes is the replacement of the Global Intangible Low-Taxed Income (GILTI) regime with the new Net CFC Tested Income (NCTI) framework.
For U.S. multinationals, the move from GILTI to NCTI requires a careful reassessment of foreign operations, supply chains, global entity structures, foreign tax credit (FTC) positions, and long-term international tax planning. The reforms increase the foreign income subject to U.S. minimum taxation, raise the effective rate of taxation, modernize FTC mechanics, and refine several Controlled Foreign Corporation (CFC) rules that have long been sources of complexity.
Introduction of NCTI: Adjustment to the U.S. Minimum Tax
OBBBA replaces the prior GILTI regime with Net CFC Tested Income (NCTI), marking a shift from a system originally designed to discourage the shifting of intangible profits offshore to a more comprehensive minimum tax applied to a wider pool of active foreign earnings.
This change signals a broader policy intent: to modernize the U.S. approach to taxing foreign income and align it more closely with evolving international norms.
Repeal of the QBAI Exclusion: Expansion of the Foreign Income Included in U.S. Taxation
Under GILTI, U.S. shareholders were entitled to a deduction equal to 10% of their Qualified Business Asset Investment (QBAI). This deduction, referred to as the Net Deemed Tangible Income Return (NDTIR), allowed companies to exclude routine returns on tangible assets such as factories, machinery, and equipment.
OBBBA eliminates the QBAI exclusion entirely, meaning that all net tested income of a CFC is now included in the NCTI tax base.
This significantly expands the income subject to U.S. minimum taxation. Companies with capital-intensive foreign operations, such as manufacturers, energy producers, and industrial groups, will now see a larger share of their foreign earnings pulled into NCTI.
Adjusted Section 250 Deduction: Increase in the U.S. Minimum Tax Rate
The Section 250 deduction permitted U.S. corporations to reduce their GILTI inclusion by 50%, producing an effective minimum tax rate of 10.5% before foreign tax credits.
OBBBA permanently reduces the Section 250 deduction to 40%, increasing the effective minimum tax rate on NCTI to 12.6% before FTCs.
This higher rate increases potential residual U.S. tax for companies operating in lower-tax jurisdictions and makes careful foreign tax modeling and FTC analysis even more important.
Foreign Tax Credit Rules
To balance the expanded NCTI base and higher tax rate, OBBBA makes several improvements to the FTC rules.
Reduction of the FTC Haircut
Under prior law, taxpayers were entitled to credit only 80% of foreign taxes paid or accrued, creating a 20% haircut that frequently resulted in unused credits.
OBBBA increases the allowable credit to 90%, providing greater ability to offset U.S. tax with foreign taxes already paid and reducing the likelihood of residual U.S. liability for companies operating in moderately taxed jurisdictions.
Expense Apportionment Relief
Prior to OBBBA, U.S. companies were required to allocate portions of their domestic interest expense and research & experimentation (R&E) costs to foreign-source income when calculating the foreign tax credit (FTC) limitation.
This allocation reduced the amount of foreign-source income available to absorb foreign tax credits, often leaving companies unable to use credits they had legitimately earned. In practical terms, it meant that U.S. expenses unrelated to foreign operations could still restrict FTC utilization, leading to situations where income was taxed both abroad and in the United States.
Under OBBBA, these domestic expenses are no longer allocated to the NCTI FTC basket. Instead:
- Only expenses that directly relate to NCTI
- Plus the Section 250 deduction
are used to reduce foreign-source taxable income for FTC purposes.
This revision allows companies to more fully utilize their FTCs and significantly reduces instances of double taxation. The change is especially beneficial for businesses with large U.S.-based financing arrangements or significant domestic R&D operations, both of which previously had a disproportionate negative impact on foreign tax credit capacity.
Key CFC and Ownership Rule Adjustments Under OBBBA
Expanded Pro-Rata Inclusion
Under prior law, a U.S. shareholder was required to include Subpart F and GILTI income only if the shareholder owned the CFC stock on the final day of the CFC’s taxable year. This provided an opportunity for some taxpayers to temporarily divest before year-end to avoid an inclusion.
OBBBA eliminates this loophole. A U.S. shareholder must now include Subpart F and NCTI income if the shareholder held stock at any point during the CFC’s taxable year. This change increases inclusion accuracy and necessitates closer attention during mergers, acquisitions, or any mid-year ownership changes.
Narrowing of Downward Attribution
Under prior law, the downward attribution rules introduced by the TCJA often produced unexpected and burdensome results. Stock ownership from a foreign parent could be “attributed downward” to a U.S. subsidiary.
This attribution resulted in many foreign-parented groups being treated as if they had Controlled Foreign Corporations (CFCs), triggering:
- Unintended Form 5471 filing obligations
- Potential Subpart F and GILTI (now NCTI) income inclusions
- Significant compliance costs and administrative burdens
OBBBA corrects this issue by limiting the circumstances in which stock owned by a foreign parent can be treated as owned by its U.S. subsidiary. Under the revised rules, a U.S. subsidiary is no longer deemed to own stock in foreign affiliates solely because a foreign parent owns both entities.
This adjustment eliminates many of the unintended CFC classifications that previously impacted foreign-parented groups and provides substantial compliance relief. Companies that were previously pulled into the CFC regime despite having no actual control over foreign operations can now avoid unnecessary reporting and income inclusions.
Conclusion: Strategic Considerations Moving Forward
The changes introduced by the OBBBA represent a comprehensive evolution in how the United States taxes foreign earnings. By transitioning from GILTI to NCTI, expanding the income base, increasing the minimum tax rate, FTC rules, and refining CFC ownership provisions, the U.S. has ushered in a new era of international tax compliance.
For U.S. multinationals, these reforms are more than technical adjustments, they create new planning challenges and new opportunities. Companies must reassess:
- Current and future foreign operational structures
- Jurisdictional effective tax rates
- Foreign tax credit utilization strategies
- Tax provision calculations and forecasting models
A proactive, data-driven evaluation is essential to ensure efficiency, minimize tax exposure, and maintain compliance under the new NCTI framework.
Disclaimer and Important Information
This content is not personalized tax advice. If you’re interested in these topics, we encourage you to reach out to us or a qualified tax professional for advice tailored to your specific situation. Nothing in this content restricts anyone from disclosing tax treatment or structure. If you need personalized tax advice, consult us or another tax professional. This information is general and subject to change; it’s not accounting, legal, or tax advice. It may not apply to your unique circumstances and requires considering additional factors. Please contact us or a tax professional before taking any action based on this information. Tax laws and other factors may change, and we are not obligated to update you on these changes
