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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 investment
incentives and the U.S. tax laws because of the
important role it is believed they play in keeping
investment in the possessions competitive with
investment in neighboring countries. The U.S.
Government imposes upon the possessions various
requirements, such as minimum wage requirements and
requirements to use U.S. flagships in transporting
goods between the United States and various
possessions, which substantially increase the labor,
transportation and other costs of establishing business
operations in Puerto Rico. Thus, without significant
local tax incentives that are not nullified by U.S.
taxes, the possessions would find it quite difficult to
attract investments by U.S. corporations.
However, investing the business earnings of these
possession corporations outside of the possession where
the business is being conducted does not contribute
significantly to the economy of that possession either
by creating new jobs or by providing capital to others
to build new plants and equipment. Accordingly, while
the committee believes it is appropriate to continue to
exempt trade or business income derived in a possession
and investment income earned in that possession, your
committee does not believe it is appropriate to provide
a tax exemption for income from investments outside of
the possession.
In addition, the committee recognizes that the
provision of present law denying a dividends received
deduction to the U.S. parent corporation forces a
possessions corporation to invest its income abroad
until the possessions corporation is liquidated
(usually upon the termination of the local tax
exemption) when it can be returned to the United States
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