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20 IRET Policy Bulletin 1 (1985)

handle is hein.taxfoundation/iretpbul0003 and id is 1 raw text is: ED rid en nomuc DYr 1331 P chln institute forresearch on the economics of taxation a tax-exempt 501(C)(3) organization ennsylvania Avenue, N.W. Suite 515 Washington, D.C. 20004 (202) 347-9570 May 3, 1985 TREASURY'S PUERTO RICAN AUSTERITY PLAN SUMMARY The Treasury proposal to repeal Section 936, if imple- mented, would deal a devastating blow to the Puerto Rican economy. Most possessions corporations would begin promptly to disinvest in their Island operations. As they reduced the amounts of their capital facilities to levels consistent with the much higher cost of capital resulting from repeal of the Section 936 cred- it, the volume of their output and employment on the Island would also be severely curtailed. Although the process of disininvestment would be spread out over several years, the adverse effects on the Puerto Rican economy would begin to be felt immediately. These economic reverses would pose a serious challenge to United States foreign and defense policies, in addition to the enormous economic problems that would arise in Puerto Rico. In its Tax Reform for Fairness, Simplicity and Economic Growth. the Treasury Department proposes to repeal Section 936 dealing with the tax treatment of possessions corporations. Possessions corporations, also known as 936 corporations, are subsidiaries of U.S. companies which receive a credit against their federal income tax liabilities equal to the amount of tax which would otherwise be payable on business and non-business income origi- nating in Puerto Rico and certain other U.S. possessions. Most of these corporations are located in Puerto Rico. Accordingly, analysis is restricted to possessions corporations in Puerto Rico. The Treasury maintains that section 936 has proved to be an ineffective means by which to assist the U.S. possessions in obtaining employment-producing investments by U.S. corpora- tions.(1) It proposes, therefore, to repeal the existing 936 Note: Nothing written here is to be construed as necessarily reflecting the views of IRET or as an attempt to aid or hinder the passage of any bill before Congress.

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