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50/50 split of combined taxable income
In general
This election will provide for a split between the
island affiliate and its U.S. affiliates of the
combined taxable income of the island affiliate and its
U.S. affiliates with respect to products produced, in
whole or in part, in the possession. 50% of such
profit will be allocated to the island affiliate; 50%
will be allocated to its U.S. affiliates.
Significant business presence
For an island affiliate to be eligible to apply
the profit split, it must satisfy one of the
significant business presence tests required for the
cost sharing election for the product or type of
service covered by the election. [The first prong.]
In addition, for products produced in whole or part by
the island affiliate in the possession, the profit
split method is available only if the island affiliate
manufactures or produces the product in the possession
within the meaning of the controlled foreign
corporation provisions of the Code (section 954). [The
second prong.] If the significant business presence
test (including the controlled foreign corporation
manufacturing or production rule) is not satisfied for
a product or type of service within the product area
covered by the election, no intangibles income
attributable to that product or type of service will be
eligible for the credit.
Respondent’s brief draws our attention to two passages in
the Joint Statement of Managers portion of the conference
committee report, as follows:
Congressional concerns regarding the potential adverse
effects of the possessions credit on revenues is reflected
in the conference report for section 936(h):
The provision as modified is intended to lessen
the abuse caused by taxpayers claiming tax-free
income generated by intangibles developed outside
of Puerto Rico. The conferees also intend that
the provision be administered in a fashion so as
to encourage increased Puerto Rican employment and
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