Eliminate the Net Controlled Foreign Corporation Tested Income Foreign Tax Credit Haircut

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 removes the NCTI foreign tax credit haircut by increasing allowed creditability from 90 percent to 100 percent. It leaves the NCTI inclusion rate and other settings unchanged relative to current law.

As with other international options, the economic implications are complex and not captured in our model. In this case especially, international tax policy effects are heavily dependent on the policy responses that this change evokes in other countries; while foreign tax crediting is a direct tax cut, it indirectly incentivizes, at the margin, increases in the creditable taxes. Tax Foundation modeling does not include assumptions on how or when such a response might happen.

On a conventional basis, this option would increase the primary deficit by $43.1 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.3 percent by 2056.