Adopt a Clean 15 Percent Net Controlled Foreign Corporation Tested Income Rate with Full Foreign Tax Credit Crediting

Net CFC-tested income (NCTI) is the system for taxing international earnings of US companies. It is a hybrid between a territorial and worldwide system, requiring a US shareholder of one or more controlled foreign corporations (CFCs) to partially include in current income a pro rata share of each CFC’s tested income, net of tested losses, regardless of whether the earnings are distributed.

This option makes two changes to NCTI to bring it more in line with typical international practices: setting the NCTI inclusion to 5/7 and allowing full foreign tax crediting. In combination with a 21 percent domestic rate, those settings produce a clean 15 percent effective US rate on NCTI with no foreign tax credit haircut, rather than the 12.6 percent to 14 percent effective range seen under current law, which varies based on foreign tax rate.

NCTI has no direct effects on the US economy, but likely some indirect economic effects, plus some longer-run elasticities of taxable income worthy of consideration. Operations by a US company in a foreign jurisdiction are often complementary to operations in the US. An increased tax burden on international investment may result in smaller operations abroad, and less investment in the US to support them. An increased NCTI rate would also make US companies less competitive in international mergers and acquisitions, ultimately eroding some of the NCTI base. As with other international options, the economic implications are complex and not captured in our model.

On a conventional basis, this option would decrease the primary deficit by $104.5 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 175.1 percent by 2056.