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SEC. 936 CREDIT PRESERVED BUT LIMITED UNDER TAX BILL ADOPTED BY SENATE FINANCE COMMITTEE JUNE 18; R&D INVESTMENTS DURING FY 1993 LOSE TAX CREDIT UNDER PLAN

Executive Summary

The income-based Sec. 936 tax credit for U.S. companies with Puerto Rican subsidiaries has been preserved but scaled back under tax legislation adopted by the Senate Finance Committee June 18 in an 11-9 party-line vote. The proposed revision would permit individual corporations to select one of two alternatives for claiming the limited corporate income-based tax credit. Under one, Sec. 936 benefits would be limited in 1994 to 60% of the credit allowable under current law, and the credit would be pared back an additional 5% each year until 1998 and thereafter, when the maximum allowable credit is equivalent to 40% of the benefit under current law. The second alternative would limit the income-based credit to the sum of 95% of compensation (wages plus benefits) and depreciation deductions claimed for island facilities. In addition, corporations would add to the credit any possession income taxes paid by the corporation, but only if the corporation elected a means other than the profit-split method (such as cost sharing) for allocating income from intangible property. The proposed revision of Sec. 936 was negotiated by Sens. Pryor (D-Ark.) and Bradley (D-N.J.). Bradley, representing the home state of a substantial portion of the pharmaceutical industry, favored maintaining the income-based credit. Pryor, a long-time critic of Sec. 936, previously proposed legislation to replace the tax benefit with a wage-based credit ("The Pink Sheet" Feb. 22, p. 6). In May, the Treasury Department proposed cutting Sec. 936 benefits to 60% of compensation paid to island employees. At a June 18 press conference, Finance Committee Chairman Moynihan (D- N.Y.) commented that "the original proposal by the President would have reduced tax benefits for companies doing business in Puerto Rico by $6.8 bil." The committee bill would reduce the benefit by just $3.8 bil., Moynihan said. The committee decision to cut the benefit less severely than proposed by the Administration was based on February meetings in Puerto Rico, Moynihan said. Gov. Pedro Rossello "at that time seemed to think that" a wage credit "would be something manageable because the credit per employee can be really outrageous," the senator said; however, "the commonwealth needs those jobs and needs the resources that are associated with them." Consequently, when Rossello subsequently "changed his mind and [told] us that he did not think that the island's 18% unemployment could sustain the full impact of the President's proposal...we took the $6.8 bil. and we moved it back to $3.8 bil." Like the House bill, the Senate committee measure would lift the prohibition on state Medicaid agency establishment of restrictive drug formularies. The ban was established under the 1990 Medicaid drug price rebate law. Like other tax bills of recent years, the committee-passed measure extends for one year the tax credit for research and experimentation expenditures. However, the credit does not become effective until July 1, 1993. Because the previous R&D tax credit expired on June 30, 1992, corporate R&D spending would not be covered during the 12 months until the July 1 effective date of the Finance Committee bill. Pharmaceutical and biotechnology companies and other industries that aggressively invest in R&D can be expected to protest that the credit lapse unfairly targets them for deficit reduction. The tax credit gap is one of a number of corporate tax credits that were pared from the legislation to help reduce the budgetary deficit while relying on a minimum amount of tax revenues. The committee cut tax benefits particularly to compensate for the loss of $72 bil. in proposed tax revenues that resulted from rejection of a BTU-based energy tax. Another corporate tax benefit pared from the bill is the proposed capital gains credit for long-term investment in startup companies. The Biotechnology Industry Organization said elimination of the capital gains proposal from the tax bill "will further undermine the competitiveness of the biotechnology industry in the U.S." BIO President Carl Feldbaum said loss of the venture capital incentive "would be a major blow to biotechnology companies that depend on equity markets to fund the research and development of breakthrough new drugs" and other biotech products. Although the White House has proposed reducing the venture capitalization credit limit from $100 mil. to $50 mil., Feldbaum said, "President Clinton still supports an incentive for venture capital investment, and we are counting on his support to secure it as part of the final bill." He added that the provision's sponsors, Sen. Bumpers (D-Ark.) and Rep. Matsui (D-Calif.), will try to reinsert the proposed credit into the tax bill either on the Senate floor or during a House-Senate conference.
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