Restore the 10 Percent Qualified Business Asset Investment Carveout for Net Controlled Foreign Corporation Tested Income and Foreign-Derived Deduction Eligible Income

Prior to the One Big Beautiful Bill Act (OBBBA), both the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) regimes included a qualified business asset investment (QBAI) carveout. QBAI helped divide American corporations’ international earnings into tangible income (coming from capital and labor) and intangible income (coming from trademarks, ideas, or intellectual property). It did so by deducting 10 percent of the value of tangible assets (such as buildings or machinery) from the GILTI and FDII tax bases, leaving a proxy for intangible income subject to the preferential rates.

The OBBBA removed QBAI from both calculations. Removing QBAI increased the tax burden for American companies with tangible operations abroad and reduced it for American companies that export and have tangible operations in the US. To reflect these changes, the new law renamed GILTI to “net CFC-tested income” (NCTI) and FDII to “foreign-derived deduction eligible income” (FDDEI).

This option restores the 10 percent QBAI carveout in both regimes. GILTI (NCTI) and FDII (FDDEI) work in opposite directions, so QBAI restoration has different effects on each. For GILTI, restoration is a tax cut: a substance carveout designed to focus the regime on intangible income held abroad. For FDII, restoration is a tax hike: it focuses the preferential rate on intangible income only, making FDII more like a patent box and less like an export subsidy.

Because the FDII tax hike has the greater direct domestic impact, restoring QBAI would on net reduce the deficit. 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 $28.6 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower, reaching 175.7 percent by 2056.