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Thus, the current version of the investment incentive takes the
form of a tax credit rather than an exemption.
It is clear from the legislative record that Congress was
aware of the highly favorable tax benefits afforded U.S.
corporations operating in Puerto Rico. It is equally clear that
Congress intended to retain and reaffirm such tax benefits by
enacting section 936. The Senate Finance Committee and the House
of Representatives Committee on Ways and Means stated the
following, in virtually identical reports:
The special exemption provided (under sec. 931)
in conjunction with investment incentive programs
established by possessions of the United States,
especially the Commonwealth of Puerto Rico, have been
used as an inducement to U.S. corporate investment in
active trades and businesses in Puerto Rico and the
possessions. Under these investment programs little or
no tax is paid to the possessions for a period as long
as 10 to 15 years and no tax is paid to the United
States as long as no dividends are paid to the parent
corporation.
Because no current U.S. tax is imposed on the
earnings if they are not repatriated, the amount of
income which accumulates over the years from these
business activities can be substantial. The amounts
which may be allowed to accumulate are often beyond
what can be profitably invested within the possession
where the business is conducted. As a result,
corporations generally invest this income in other
possessions or in foreign countries either directly or
through possessions banks or other financial
institutions. In this way possessions corporations not
only avoid U.S. tax on their earnings from businesses
conducted in a possession, but also avoid U.S. tax on
the income obtained from reinvesting their business
earnings abroad.
The committee after studying the problem
concluded that it is inappropriate to disturb the
existing relationship between the possessions
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