Tax Policy:

Puerto Rico and the Section 936 Tax Credit

GGD-93-109: Published: Jun 8, 1993. Publicly Released: Jul 9, 1993.

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Pursuant to a congressional request, GAO presented information relevant to Congress' consideration of proposals to revise the Internal Revenue Code section 936 tax credit, which primarily affects Puerto Rico and the subsidiaries of U.S. companies that operate there.

GAO found that: (1) the impact of any change to section 936 on the Puerto Rican economy depends on how to the change affects the demand for Puerto Rican resources, the firms' individual circumstances, and the specific tax; (2) the proposal to restrict section 936 tax credits would alter the incentives for some current and potential section 936 firms; (3) a wage credit cap on section 936 tax credits would affect less than half of the section 936 manufacturing firms analyzed; (4) most labor-intensive section 936 firms would not be affected by the revised tax credit; (5) the impact on Puerto Rico's economy of reducing section 936 tax credits may not be proportional to the credits lost because they are not tied to the use of Puerto Rican resources; (6) the growth rate for Puerto Rico's gross domestic product indicated that an increasing portion of total income produced in Puerto Rico went to U.S. and foreign investors; (7) from 1971 to 1991, unemployment in Puerto Rico remained high; (8) five manufacturing industries accounted for 90 percent of the tax benefits received by section 936 firms in 1985, 1987, and 1989; and (9) section 936 manufacturing firms represented 11 percent of the total workforce.