While the US Congress had planned to eliminate Section 936 of the Internal Revenue Code this year, the benefit is likely to be extended. The House version extends and freezes the benefits at the current level for another six to 10 years, while the Senate version is more complicated.
Although the credit is generally eliminated for the taxable years beginning after December 31, 1995, transition rules are proposed, with different rules applying in different scenarios. The phase-out period and the applicable tax credit depends on whether a company with an existing Puerto Rico operation uses the economic activity limit or the applicable percentage allowed under the earlier implementing legislation.
For those falling into the former category (economic activity), the credit will not apply for taxable years starting in 2002; for the latter, beginning in 1999, the credit is phased out by percentages, until it no longer applies, starting in 2002. Within the language of the bill is a statement that, given the high costs of these tax benefits are borne by all US taxpayers and in light of current budgetary constraints, the continuation of the tax exemption provided to these companies is no longer appropriate.
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