Reduce the Net Controlled Foreign Corporation Tested Income Inclusion Rate to 50 Percent

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 lowers the share of NCTI included in the US corporate tax base from 60 percent to 50 percent. In broad terms, it reduces the residual US tax burden on covered foreign earnings relative to current law. Under this option, NCTI would be taxed in a 10.5 percent to 11.67 percent range, depending on foreign tax rates, rather than the 12.6 percent to 14 percent range seen under current law.

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. A reduced tax burden on international investment may support larger operations abroad, and greater investment in the US to support them. A reduced NCTI rate would also make US companies more competitive in international mergers and acquisitions, ultimately bringing more income into 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 increase the primary deficit by $124.0 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.9 percent by 2056.