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tax free. These accumulated business profits are not
available for investment within the United States, and
the income produced is (under present law) not subject
to U.S. tax. The committee believes that while it is
appropriate to tax the foreign source investment income
from possession business earnings, possessions
corporations should at the same time be given the
alternative of returning the business income to the
United States prior to liquidation without paying U.S.
tax. Permitting tax-free repatriation of the
accumulated earnings only upon the liquidation of the
possessions corporation, while taxing the foreign
source investment derived from the accumulated
earnings, would lessen to a significant extent the tax
incentive of making the initial investment.
To accomplish these two major changes, the
committee’s amendment revises present law to provide
for a more efficient system for exemption of
possessions corporations. Under the amendment, these
corporations are generally to be taxed on worldwide
income in a manner similar to that applicable to any
other U.S. corporation, but a full 48 percent foreign
tax credit is to be given for the business and
qualified investment income from possessions regardless
of whether or not any tax is in fact paid to the
government of the possession. The effect of this
revised treatment will be to exempt from tax the income
from business activities and qualified investments in
the possessions, to allow a dividends received
deduction for dividends from a possessions corporation
to its U.S. parent corporation, and to tax currently
all other foreign source income of possessions
corporations (with allowance for the usual foreign tax
credit). The committee believes that this revised
treatment will assist the U.S. possessions in obtaining
employment-producing investments by U.S. corporations,
while at the same time encouraging those corporations
to bring back to the United States the earnings from
these investments to the extent they cannot be
reinvested productively in the possession. [S. Rept.
94-938, at 277-278 (1976), 1976-3 C.B. (Vol. 3) 57,
315-316; fn. refs. omitted.]
See also H. Rept. 94-658, at 254-255 (1975), 1976-3 C.B. (Vol. 2)
945, 946-947.
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