The global intangible low-taxed income (GILTI) tax regime has been a significant element of U.S. international tax law since its introduction in the Tax Cuts and Jobs Act of 2017 (TCJA). With the advent of the One, Big, Beautiful Bill Act (OBBB), business owners with international operations face a new wave of changes to the GILTI framework. This article examines the technical updates to the GILTI regime under the new legislation, focusing on practical implications for business owners and offering guidance on how to navigate the evolving landscape.
What is GILTI?
GILTI was designed to target U.S. shareholders of controlled foreign corporations (CFCs) and ensure that intangible income earned abroad is subject to a minimum level of U.S. tax. The regime calculates a taxable U.S. inclusion amount based on the income of foreign subsidiaries, minus a deemed return on tangible assets, and applies a U.S. tax rate that’s typically lower than the standard corporate rate due to the allowable deduction and foreign tax credits.
Key updates to the calculation of GILTI under the OBBB
The OBBB introduces several technical modifications to the GILTI regime, with the goal of better aligning the objectives of incentivizing manufacturing operations in the United States and curbing profit shifting to foreign jurisdictions. Additionally, several terms/acronyms were updated or replaced with the former term, beginning with replacing the name GILTI with “net CFC tested income” or NCTI. The following are the most significant changes to the calculation of NCTI:
- Elimination of the qualified business activities investment. The OBBB eliminates the QBAI deduction from the calculation of NCTI for tax years beginning after Dec. 31, 2025. Previously, the QBAI reduction was calculated as 10% of the net tax value of tangible business assets, reduced by deductible interest expense. For businesses with extensive global manufacturing and distribution networks, the loss of the 10% QBAI reduction to their NCTI income inclusion could dramatically increase the U.S. tax burden on foreign operations.
- Reversion to EBITDA basis for calculating Section 163(j) limitation. For taxable years after Dec. 31, 2021, to date, the adjusted taxable income (ATI) limitation for determining deductible business interest expense didn’t allow for the addback of depreciation, amortization, and taxes. For tax years beginning after Dec. 31, 2024, the calculation will allow for the addback of these items before applying the 30% limitation, increasing the ATI base and generally resulting in a greater deduction of business interest expense.
- Reduction of the NCTI deduction (Section 250 deduction). The allowable deduction against NCTI is reduced to 40% (formerly 50%), for taxable years beginning after Dec. 31, 2025. For business owners, this means a higher effective tax rate of 12.6% on NCTI inclusions compared to the previous rate of 10.5% under GILTI, which may significantly impact after-tax profits from foreign operations.
- Changes to foreign tax credit limitation. The act modifies the haircut amount applied to foreign tax credits (FTCs) in the NCTI group, increasing the allowable amount to 90% (formerly 80%). This is a favorable change for taxpayers and may help to offset some of the tax leakage caused by the elimination of QBAI and reduction in the NCTI deduction (Section 250 deduction). Combined, at the maximum available usage of the reduction amount and FTC amount, U.S. corporate income tax on foreign profits subjected to a foreign tax rate of at least 14% could be fully offset through the Section 250 deduction and FTC mechanisms.
- Changes to the calculation of foreign sourced income for foreign tax credit purposes. General expectations that foreign taxes paid meeting or exceeding the 13.125% effective rate should result in zero additional tax burden on GILTI income were met with surprise, as residual U.S. tax often still resulted from the allocation of certain expenses, even when foreign taxes exceed the threshold rate. The act addresses this issue by removing the requirement to allocate and apportion U.S. expenses to the NCTI basket, such as interest expense and research and development expenses. For tax years beginning after Dec. 31, 2025, only directly allocable expenses will reduce the NCTI income for purposes of the FTC calculation. This should result in U.S. taxpayers being able to claim more of their eligible foreign taxes as a credit against U.S. tax liability.
- Unchanged provisions affecting NCTI inclusions and calculations. While many of the changes above will affect the overall inclusion and foreign tax credit offset related to NCTI, the ability to make the high-tax exclusion election and the tested unit approach for calculating the high-tax effective rate of the election remains the same under the new rules.
- Other related changes to the taxability of foreign subsidiaries. Such as the ending of the one-month deferral, methodology for proration of Subpart F and GILTI income in transactions, and foreign income sourcing rules, which were previously covered in our summary of the OBBB. While not directly impacting the calculation of NCTI, these changes can have meaningful impacts on certain affected taxpayers.
Business owner implications of the GILTI regime updates
The updates to the NCTI regime under the OBBB have several direct implications for business owners.
- Potential rise in U.S. tax liability on low-taxed foreign earnings: With reduced deductions, many business owners will see an increase in their overall U.S. tax burden on foreign earnings.
- Strategic reconsideration of foreign structures: Companies with subsidiaries in multiple countries may need to reevaluate their global tax strategies, including the location of intellectual property, financing arrangements, and operational footprints.
- Cash flow and investment impact: Higher taxes on foreign income can reduce available cash for reinvestment and growth, requiring business owners to reassess expansion plans or capital allocation.
Practical steps for business owners for the GILTI regime changes
To mitigate the impact of these changes, business owners should consider the following actions:
- Review international tax structures. Conduct a thorough analysis of CFC operations to identify jurisdictions most affected by the new GILTI rules.
- Consult tax professionals. Work with international tax advisors to optimize use of foreign tax credits and deductions under the new regime.
- Model cash flow scenarios. Forecast the impact of increased tax liabilities on cash flow and plan accordingly for financing and investment needs.
The OBBB brings significant changes to the GILTI tax regime, challenging business owners to adapt. By understanding the technical updates and proactively adjusting tax and operational strategies, U.S. businesses with foreign operations can navigate the new rules and position themselves for continued success in an increasingly complex global tax environment.
