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Executive Summary

Sen. Packwood's (R-Ore.) approach to Section 936 Puerto Rican tax credits is similar in at least two major points to the proposal developed last year in the House by Ways & Means Cmte. Chairman Rostenkowski (D-Ill.). According to a staff summary, the Packwood proposal, which was unanimously adopted by the Senate Finance Cmte. on May 8, appears to correspond with the House version in reducing the amount of passive income attributable to a Puerto Rican subsidiary which receives a tax credit. Also, both proposals would increase the current required payment under the cost sharing option. Under the Packwood proposal, the summary states, "for section 936 companies . . . the required cost sharing payment would be increased to 110% of the present law cost sharing payment." A press release describing the House plan when it moved through the Ways & Means Cmte. last December explained that cost sharing payments would "be equal to the greater of: (1) the present law cost sharing payment increased by 10% or (2) the royalty payment that would be required . . . if the possession corporation were a foreign subsidiary of the U.S. parent corporation." The summary of the Senate plan makes no reference to a royalty payment option. For Section 936 companies, the "passive income limitation would be reduced from 35% to 25%," according to the Senate summary. Explaining the provision in terms of active business instead of passive income, the House press release said that the Ways & Means proposal increases "from 65% to 75% the portion of possession corporation income required to be derived from the conduct of an active trade or business." The House plan provides for a two year phase-in of the passive income provision. The Senate Finance Cmte.'s bill also includes a provision for investment in Carribean Basin Initiative countries. The summary of the bill states: "Income from investments in financial institutions that are used for certain investments in active business assets in a qualified Caribbean Basin Initiative country or development project in a qualified CBI country would be eligible for U.S. tax exemption. Compliance rules would be provided." Concerning qualifications for Sec. 936 credit, the summary notes that "the requirement that funds be received in a possession to qualify for the section 936 credit would not apply to funds received from unrelated parties." The final form of tax reform legislation will be worked out by a House/Senate conference cmte. if Sen. Packwood's bill clears the Senate. Majority leader Dole (R-Kan.) has said he intends to bring the tax bill to the floor on June 2. Once on the floor, the bill will be open to amendments which could substantially change the nature of the measure. If special interest amendments proliferate, the Senate tax reform effort could collapse under the extra political weight. In other provisions of the Packwood bill, the R&D credit would be extended for four years (through 1989) at the present 25% rate, "with modifications to the credit definition of research and with increased incentives for university basic research," the summary states. It also notes that "a two-year rule would be adopted allowing the allocation of 75% of U.S.-incurred research expenditures against U.S. income." Under the House cmte. proposal a tax credit would be extended for new R&D expenses at a 20% annual rate over the next three years. Under general provisions of the tax proposal, the top corporate tax range is reduced nearly one-third to 33%. The summary explains that "over the next five years, the tax burden of individuals would be reduced by approximately $100 bil., while corporate taxes would increase by a similar amount." The House cmte. bill includes a maximum corporate income tax rate of 36%. In addition, the Senate bill would repeal the investment tax credit, effective Jan. 1, 1986.

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