must be from sources within a possession. Second, 50 percent or more of its gross income must be derived from the active conduct of a trade or business within a possession.

The amount of the credit allowed under this provision is to equal the portion of the U.S. tax of the domestic corporation attributable to taxable income from sources without the United States from the active conduct of a trade or business within a possession of the United States and from qualified possession source investment income. In determining the amount of tax attributable to the income from the active conduct of a possession trade or business or from qualified possession investment income, losses from other sources are to be taken into account. For example, if a possessions corporation has losses from foreign sources (other than possession sources), these losses reduce income from U.S. sources and income from possessions sources proportionately for purposes of determining the tax on the taxable income from which the section 936 credit is allowed.

Qualified possession source investment income includes only income from sources within a possession in which the possessions corporation actively conducts a trade or business (whether or not such business produces taxable income in that taxable year). Furthermore, the taxpayer must establish to the satisfaction of the Secretary that the funds invested were obtained from the active conduct of a trade or business within that same possession and were actually invested in assets in that possession. Funds placed with an intermediary (such as a bank located in the possession) are to be treated as invested in that possession only if it can be shown that the intermediary did not reinvest the funds outside the possession. The special treatment for qualified possession source investment income is provided so that the possessions do not lose a significant source of capital which they presently have available to them for the financing of government development programs and private investment.

To avoid a double credit against the same tax if a corporation is eligible for the section 936 credit, any actual taxes paid to a foreign country (because it has different source rules) or a possession with respect to the gross income taken into account for the credit are not treated as a creditable tax (under sec. 901 of the Code), and no deduction is to be allowed with respect to that tax. Thus, the section 936 credit replaces entirely any section 901 foreign tax credit and any deduction for taxes paid which otherwise would be allowed with respect to the income taken into account.

Since the new section 936 tax credit is separate from the tax credit permitted under section 901, the limitation under section 904 of the Code is not to apply to income subject to a section 936 credit, and such income is not to be taken into account in computing the limitation on the amount of allowable tax credits (under sec. 904 of the Code)."

The credit provided for under section 936 is generally to be allowed against taxes imposed by chapter 1 of the Internal Revenue Code. However, the credit is not to be taken against any minimum tax for tax preferences (sec. 56 of the Code), any tax on accumulated earnings (sec. 531 of the Code), taxes relating to recoveries of foreign expropriation losses (sec. 1351 of the Code), or the personal holding company tax (sec. 541 of the Code). In computing the amount of U.S. tax paid by the corporation which is attributable to possessions active trade or business and qualified investment income, taxes paid relating to the items described above are not taken into account.

In order to receive the benefits of the section 936 tax credit, a corporation must make an election at the time and in the manner as the Secretary prescribes by regulations. Once the election is made, the domestic corporation cannot join in a consolidated return with other related taxpayers. The election is to remain in effect for nine taxable years after the first year for which the election was effective and for which the domestic corporation satisfied the 80 percent possession source income and 50 percent active trade or business income requirements. However, the election may be revoked before the expiration of the 10-year period with the consent of the Secretary. It is contemplated that consent will be given only in cases of substantial hardship where no tax avoidance can result from the revocation of the election.

Thus, the numerator and denominator of the limiting fraction (provided in sec. 904) are to be calenlated without regard to the taxable income for which a credit is permitted under section 936.

Your committee's bill also provides that any losses incurred by a domestic corporation before or after it elects and qualifies for the section 936 tax credit are to be recaptured if the corporation subsequently has income eligible for the section 936 credit, or if the corporation has any income eligible for the section 901 tax credit.45

The bill retains existing law by providing that any gross income actually received by a possessions corporation within the United States, whether or not that income is derived from sources within or without the United States, is not taken into account as income for which a section 936 tax credit may be allowed. However, this income may be eligible for a section 901 tax credit if any foreign taxes were paid on that income.

Finally, the bill provides for a dividends-received deduction (sec. 246 (a) (1) of the Code) for dividends received from corporations eligible for the section 936 tax credit. Thus, corporations which otherwise would qualify for the 100percent dividends-received deduction if an election (under sec. 936) were not in effect are to receive that deduction for dividends from a possessions corporation. Also, corporations eligible for the 86-percent dividends-received deduction are to receive that deduction with respect to dividends from possessions corporations. In the case of a corporation eligible for the 85-percent dividendsreceived deduction, the amount of any taxable income received as a dividend from a possessions corporation is to be domestic or foreign source income as determined under existing rules of the Code (sec. 861), and is to be included in the computation of the limitation on the section 901 foreign tax credit (sec. 904 of the Code).

The amendments made by this section establishing a new section 936 foreign tax credit for certain possessions income applies to taxable years beginning after December 31, 1974. The new rules on the dividends-received deduction apply to dividends received in taxable year beginning after that date regardless of when the earnings out of which the dividends were paid were accumulated.

ESTADO LIBRE ASOCIADO DE PUERTO RICO,
ADMINISTRATION DE FOMENTO ECONOMICO,
San Juan, P.R., July 15, 1975.

CERTIFICATION

During the fiscal year 1974-75, 168 new plants promoted by the Economic Development Administration started operations with a total employment of 2,316 at the date at first payroll. It is estimated that these plants will report an employment of about 3,400 as of June 1975. In the same period 110 promoted plants closed permanently. Their total employment at the beginning of the fiscal year was 7,809 and at close of operations, 4,538.

This information is based on individual reports of start ups and closing prepared by the Industrial Services Department and is subject to minor revisions. At this moment, information of the total payroll for the referenced plant is not available. However. the average hourly earnings for the manufacturing industries was $2.51 for March 1975, according to the Commonwealth Bureau of Labor Statistics.

LEWIS SMITH, Director, Office of Economics and Planning.

PUERTO RICO-BASIC ECONOMIC AND SOCIAL DATA

I. UNEMPLOYMENT

Unemployment is a serious and crippling problem in the Commonwealth of Puerto Rico. The decades have witnessed a slight fluctuation of the unemployment situation: in 1940, 11%; in 1950 and 1960, 13%; in 1970, 11%. The highest rate of unemployment in the past thirty five years was recorded in January 1975, when 17.2% (149,000 people) of a labor force of 867,000 was unemployed.

45 Thus, if a possessions corporation had losses before it elected to be eligible for the section 936 credit. any subsequent taxable income otherwise eligible for the section 936 credit is treated as U.S. source income (and thus is not eligible for the section 936 credit) as is provided under the rules for recapturing losses applicable to the section 901 tax credit (sec. 342 of this bill).

These unemployment statistics reflect the number of people who were actively seeking work at the time of the particular survey. It has been estimated, however, that the real unemployment rate, which accounts for those who are willing and able to work but who have ceased looking for work, exceeds 30%. This estimate indicates a potential labor force in Puerto Rico of 1,128,000 of whom 718,000 are reported employed and 410,000 are without work. Unless the economy shows signs of improvement, an even higher rise in employment can be projected for the latter part of 1975.

In April 1975, the Government of Puerto Rico was forced to draw $10 million from the Unemployment Insurance Reserve Fund. According to the United States Department of Labor, Unemployment Administration, it is realistic to assume that there will be further substantial draw-downs from the fund during the calendar year 1975.

II. COST OF LIVING IN PUERTO RICO

The cost of living in Puerto Rico is considerably higher than in most areas of the United States. This is primarily due to the fact that Puerto Rico must import a very large percentage of its total goods for consumption and production. For example, in 1973, Puerto Rico imported consumer goods and raw materials totaling some $3.6 billion; and approximately 60% of all foodstuffs consumed in Puerto Rico in 1973, was imported. The United States Department of Labor surveys done for the U.S. Civil Service Commission consistently show higher costs than in the Washington, D.C., area. Based on the latest such survey, the Commission has established a 7.5% cost of living differential for federal employees working in Puerto Rico.

The Puerto Rican Department of Labor regularly collects and reports cost of living data for the Island. A recent report1 provided dramatic evidence of the inroads inflation has made into the purchasing power of the dollar in Puerto Rico, particularly in the past year.

The above figures show that there has been a 50% increase in living costs in Puerto Rico over the past seven years, with more than half of this increase occurring in the past year. Viewing this in terms of the effect of the value of the dollar in 1974, we can see that today the dollar in Puerto Rico buys less than two-thirds of what it bought in 1967.

The wage earner's families needed $16.25 in February 1975 to buy the goods and services which they bought with $15.01 in May 1974, $12.32 in May 1973 and with $10.00 in 1967.

The impact of inflation has been particularly severe on public welfare recipients. In 1967, the federal government provided a maximum of $9.8 million in welfare assistance to Puerto Rico, to be matched equally by the Commonwealth. In 1968, P.L. 90-248 raised this ceiling in steps to the present $24 million, still with 50-50 matching. This increase in federal assistance, however, did not permit the Commonwealth to keep pace with inflation, given the increase in the number of recipients resulting from burgeoning population and the expanded kinds of services required by the federal government.

1 Consumers Price Index for Wage Earner's Families in Puerto Rico (Bureau of Labor Statistics, P.R. Department of Labor).

III. BUDGET DEFICITS

Listed below are the estimated Fiscal Year 1975 budget deficits of ten selected states and the Commonwealth of Puerto Rico. This table demonstrates the disproportionately high per capita deficit of Puerto Rico as compared with the States listed in the table.

The following table illustrates the difference in federal outlays to Puerto Rico as compared to federal payments to selected states on the mainland.

V. DIRECT AND INDIRECT BENEFITS ACCRUING TO THE VARIOUS STATES BY VIRTUE OF PURCHASES BY PUERTO RICO

While Puerto Rico is a recipient of the assistance from the federal government, the relationship that exists between the United States and Puerto Rico is definitely not one that is of benefit to Puerto Rico alone. Puerto Rico is the fifth largest (after Canada, Great Britain, Japan and West Germany) purchaser of U.S. products in the world, and on a per capita basis, Puerto Rico provides the largest market. Approximately 75% of all imports into Puerto Rico come from the United States.

A detailed study undertaken by the Puerto Rico Economic Development Administration shows that for FY 1974, products with a value of $2.68 billion were shipped from the United States to Puerto Rico. These sales represent some $2.52 billion in gross income and 139,000 jobs in accrued benefits to the United States. Although impressive, these figures are nevertheless an extremely conservative estimate of the true economic impact of Puerto Rico's purchases on the United States economy. The study in question excluded from consideration the income and job generating effect of Puerto Rico's purchases from the United States of advertising, banking, insurance and shipping services. Furthermore, the reported benefits did not include any multiplier effect or cumulative effect of the spending and respending by U.S. residents of the initial income earned from sales to Puerto Rico.

The largest portion of Puerto Rico's purchases from the United States in FY 74 was in the category of miscellaneous manufacturers. This category accounted for 8.0% of the total income and 8.6% of the total employment ($200 million and 12,073 jobs) benefits generated to the United States. Motor vehicles and other transportation equipment, ($141 million in income and 7,436 jobs); fabricated metal products ($117 million in income and 5,586 jobs); and meat products ($115 million in income and 5,521 jobs), were the next most important product categories for Puerto Rico's purchases from the United States in FY 1974.

Considering broader groupings of products, however, Puerto Rican food purchases (which include meat products, grains, canned goods, beverages, etc.) in FY 1974 were overall the largest generators of income ($662 million) and employment (35,000 jobs) benefits in the United States. The textiles and apparel category was the second most important group, accounting for some $272 million and 19,000 jobs in benefits.

In terms of income and employment benefits derived, the ten states most affected were as follows:

VI. SALIENT FACTS ABOUT PUERTO RICO AS COMPARED TO THE UNITED STATES AND FIVE OTHER COUNTRIES

The following random statistics emphasize that Puerto Rico has made tremendous progress, partly due to its relationship with the United States, when compared to Latin America and Caribbean countries. However, we find it lagging far behind when compared to the States of the Union.

The birth rate in Puerto Rico is higher than that of the United States and its death rate is lower. In 1973, the birth rate was 23.2 per 1,000 and the death rate was 6.5 per 1.000, compared to the United States averages of 15.6 and 9.4 respectively. This dramatically compared with 48.5 and 14.7 for the Dominican Republic and 49 and 17.1 for Honduras. Puerto Rico's population as of July 1973 was 2.912,000 inhabitants, compared to 2,689.932 in June 1970, representing an increase of 223,000 in a three year period. This has resulted in a population density for Puerto Rico of 847 people per square mile today, as compared to 792 per square mile in June 1970. The current density level is exceeded only by two states. Rhode Island and New Jersey, with respective population densities of 927 and 987. To make Puerto Rico's density a more salient fact, the United States would have to reach a population of 2,995,716,185 in order to have a density of 847 people per square mile. The populations of 4,432,000 for the Dominican Republic and 2.781.000 for Honduras give those countries population densities of 242 people per square mile and 65 per square mile respectively.

By 1975, it is estimated that approximately sixty percent (60%) of Puerto Rico's population will be under twenty-five (25), of which one-third will be less than thirteen (13) years old. At the other end of the age spectrum. life expectoney in 1971 was 72 years (U.S. National Average was 71.1), indicating a clear tendency toward an increase in the population of the aged (as opposed to 58 years life expectancy in the Dominican Republic and 49 years in Honduras). The growing size of these age groups in Puerto Rico will place increasingly greater demands on the financial resources of the Commonwealth Government to provide needed social services.