Goodbye QBAI: Why the Shift to NCTI Increases the Taxable Base for Foreign Income

For nearly a decade, the international tax strategies of U.S. multinationals have been anchored by the Global Intangible Low-Taxed Income (GILTI) regime. Introduced by the 2017 Tax Cuts and Jobs Act, GILTI was designed to discourage the shifting of intangible assets (like patents and software) to low-tax offshore jurisdictions. However, as of January 1, 2026, the legislative landscape has undergone its most significant transformation since 2017.

With the passage of the One Big Beautiful Bill Act (OBBBA) in mid-2025, the GILTI regime has been officially rebranded as Net CFC Tested Income (NCTI). This shift is far more than a naming exercise. The most profound change is the total elimination of the Qualified Business Asset Investment (QBAI) deduction. For business owners with heavy offshore investments in tangible property, this Goodbye to QBAI signals a broader taxable base and a fundamental rethinking of international tax efficiency.

The End of the 10% Tangible Return Carveout

Under the previous GILTI rules, U.S. shareholders were only taxed on foreign earnings that exceeded a normal return on tangible assets. This normal return was defined as 10% of the adjusted basis of Qualified Business Asset Investment (QBAI), tangible property like factories, machinery, and warehouses. Effectively, if your Controlled Foreign Corporation (CFC) had $100 million in manufacturing equipment, the first $10 million of profit was exempt from GILTI, as it was deemed a return on physical assets rather than intangibles.

The OBBBA has completely removed this net deemed tangible income return. According to the BDO analysis of the OBBBA international provisions, U.S. shareholders are now required to include the entirety of a CFC’s tested income in their U.S. taxable base without any reduction for QBAI. This marks a shift from taxing intangible income to taxing a broader category of net foreign income, regardless of whether it was generated by a patent or a production line.

Why Asset-Intensive Businesses Face the Sharpest Increase

The removal of the QBAI carveout does not affect all companies equally. Tech firms and service providers with few physical assets will likely see minimal change to their taxable base. However, for manufacturing, mining, and hospitality businesses with substantial offshore footprints, the impact is immediate and significant.

By eliminating the 10% return on tangible assets, the OBBBA has effectively expanded the taxable net for these companies. Income that was previously untaxed at the federal level because it was tied to physical factories is now fully includible as NCTI. This expansion of the base is a key driver for the increased effective tax rate (ETR) on foreign earnings, which has risen from the historical 10.5% to approximately 12.6% under the new Section 250 deduction rules.

The Section 250 Deduction: A Permanent 40% Shield

While the taxable base has widened, the OBBBA has provided some stability by making the Section 250 deduction permanent. Under the old law, the deduction for GILTI was set to decrease, which would have spiked tax rates. The OBBBA intervened by setting the deduction for NCTI at a permanent 40%.

As detailed in the Plante Moran summary of the OBBBA, this 40% deduction applies to the expanded NCTI base. While the rate is higher than the previous 10.5% effective rate, it is lower than the 16.4% rate that many analysts feared would take effect in 2026 without legislative intervention. For most multinationals, the goal is now to manage this 12.6% U.S. tax liability through improved foreign tax credit utilization.

Silver Linings: Reduced FTC Haircuts and Expense Allocation

To offset the sting of a larger taxable base, the OBBBA introduced two significant taxpayer-favorable modifications to the Foreign Tax Credit (FTC) regime. These changes aim to mitigate double taxation, ensuring that U.S. companies aren’t penalized for operating in higher-tax jurisdictions.

• The 90% FTC Allowance: Previously, U.S. corporations faced a 20% haircut on foreign taxes paid, meaning they could only credit 80% of their foreign taxes against their U.S. GILTI liability. The OBBBA reduced this haircut to 10%, allowing companies to claim a 90% credit.
• Removal of Expense Allocation: One of the most criticized aspects of the GILTI regime was the requirement to allocate U.S. expenses (like interest and R&D) to the foreign tax basket, which often artificially lowered the FTC limit. The OBBBA has ended this practice for NCTI.

According to RSM US insights on international reform, this change in expense allocation allows for a much cleaner credit. For many taxpayers, the ability to fully utilize foreign tax credits without the drag of domestic interest expense will more than offset the loss of the QBAI deduction, particularly for those operating in countries with corporate tax rates above 15%.

Strategic Planning: Evaluating U.S. vs. Foreign Assets

The Goodbye to QBAI creates a new decision-making matrix for capital investment. Historically, the tax code incentivized holding tangible assets offshore because they provided a tax-free return under GILTI. With that incentive gone, the relative benefit of holding those assets in the U.S. has increased, especially when combined with the OBBBA’s permanent 100% bonus depreciation for domestic equipment.

Business owners must now ask: Does it make sense to manufacture offshore if the tangible return is fully taxed in the U.S.? For many, the answer may be to move high-value manufacturing back to the States to take advantage of domestic incentives while using the new foreign-derived deduction eligible income (FDDEI) rules to lower the tax on exports.

Looking Ahead: The Side-by-Side Minimum Tax

The shift to NCTI also aligns the U.S. more closely with the OECD’s global minimum tax framework, though key differences remain. The U.S. continues to use global blending, allowing high-tax credits from one country to offset low-tax income from another. This remains a significant advantage for U.S. multinationals compared to the jurisdictional blending required by many European nations.

However, the removal of QBAI, often called a substance-based income exclusion in other frameworks, signals that the U.S. is moving toward a system where almost all profit is subject to some level of immediate tax. Planning for 2026 requires a comprehensive review of your CFC’s tested income and a precise calculation of how the new 90% FTC allowance will interact with your expanded taxable base.

Connect with a Global Tax Strategist

Navigating the transition from GILTI to NCTI is a high-stakes transition that requires specialized international tax expertise. The elimination of the QBAI carveout can create unexpected tax liabilities for even the most well-established businesses. At Top Tax Planners, we connect you with a curated network of the country’s leading international tax professionals. Our vetted experts specialize in OBBBA compliance, foreign tax credit optimization, and cross-border entity structuring. Don’t wait for your 2026 tax return to discover the impact of the new foreign income rules. Visit the Top Tax Planners Directory today to find a qualified tax professional who can help you optimize your global tax footprint and protect your international profits.