LIMITATION ON SECTION 936 CREDIT.

SEC. 13227. LIMITATION ON SECTION 936 CREDIT. (a) General Rule.— Subsection (a) of section 936 (relating 26 use 936. to Puerto Rico and possession tax credit) is amended— (1) by striking “as provided in paragraph (3)” in paragraph (1) and inserting “as otherwise provided in this section”; and (2) by adding at the end thereof the following new paragraph: “(4) Limitations on credit for active business income.— “(A) In general.— The amount of the credit determined under paragraph (1) for any taxable year with respect to income referred to in subparagraph (A) thereof shall not exceed the sum of the following amounts: “(i) 60 percent of the sum of— “(I) the aggregate amount of the possession corporation’s qualified possession wages for such taxable year, plus “(II) the allocable employee fringe benefit expenses of the possession corporation for the taxable year. “(ii) The sum of— “(I) 15 percent of the depreciation allowances for the taxable year with respect to short-life qualified tangible property, “(II) 40 percent of the depreciation allowances for the taxable year with respect to medium-life qualified tangible property, and “(III) 65 percent of the depreciation allowances for the taxable year with respect to long-life qualified tangible property. “(iii) If the possession corporation does not have an election to use the method described in subsection (h)(5)(C)(ii) (relating to profit split) in effect for the taxable year, the amount of qualified possession income taxes for the taxable year allocable to nonsheltered income. “(B) Election to take reduced credit.— “(i) In general.— If an election under this subparagraph applies to a possession corporation for any taxable year— “(I) subparagraph (A), and the provisions of subsection (i), shall not apply to such possession corporation for such taxable year, and “(II) the credit determined under paragraph (1) for such taxable year with respect to income referred to in subparagraph (A) thereof shall be the applicable percentage of the credit which would otherwise have been determined under such paragraph with respect to such income. Notwithstanding subclause (I), a possession corporation to which an election under this subparagraph applies shall be entitled to the benefits of subsection (i)(3)(B) for taxes allocable (on a pro rata basis) to taxable income the tax on which is not offset by reason of this subparagraph. 107 STAT. 490 “(ii) Applicable percentage.— The term ‘applicable percentage’ means the percentage determmed in accordance with the following table: “In the case of taxable year beginning in: The percentage is: 1994 60 1995 55 1996 50 1997 45 1998 and thereafter 40. “(iii) Election.— “(I) In general.— An election under this subparagraph by any possession corporation may be made only for the corporation’s first taxable year beginning after December 31, 1993, for which it is a possession corporation. “(II) Period of election.— An election under this subparagraph shall apply to the taxable year for which made and all sunsequent taxable years unless revoked. “(III) Affiliated groups.— If, for any taxable year, an election is not in effect for any possession corporation which is a member of an affiliated group, any election under this subparagraph for any other member of such group is revoked for such taxable year and all subsequent taxable years. For purposes of this subclause, members of an affiliated group shall be determined without regard to the exceptions contained in section 1504(b) and as if the constructive ownership rules of section 1563(e) applied for purposes of section 1504(a). The Secretary may prescribe regulations to prevent the avoidance of this subclause through deconsolidation or otherwise. “(C) Cross reference.— “For definitions and special rules applicable to this paragraph, see subsection (i).” (b) Definitions and Special Rules.— Section 936 is amended by adding at the end thereof the following new subsection: “(i) Definitions and Special Rules Relating to Limitations of Subsection (a)(4).— “(1) Qualified possession wages.— For purposes of this section— “(A) In general.— The term ‘qualified possession wages’ means wages paid or incurred by the possession corporation during the taxable year in connection with the active conduct of a trade or business within a possession of the United States to any employee for services performed in such possession, but only if such services are performed while the principal place of employment of such employee is within such possession. “(B) Limitation on amount of wages taken into account.— “(i) In general.— The amount of wages which may be taken into account under subparagraph (A) with respect to any employee for any taxable year shall not exceed 85 percent of the contribution and benefit 107 STAT. 491base determined under section 230 of the Social Security Act for the calendar year in which such taxable year begins. “(ii) Treatment of part-time employees, etc.— If— “(I) any employee is not employed by the possession corporation on a substantially full-time basis at all times during the taxable year, or “(II) the principal place of employment of any employee with the possession corporation is not within a possession at all times during the taxable year, the limitation applicable under clause (i) with respect to such employee shall be the appropriate portion (as determined by the Secretary) of the limitation which would otherwise be in effect under clause (i). “(C) Treatment of certain employees.— The term ‘qualified possession wages’ shall not include any wages paid to employees who are assigned by the employer to perform services for another person, unless the principal trade or business of the employer is to make employees available for temporary periods to other persons in return for compensation. All possession corporations treated as 1 corporation under paragraph (5) shall be treated as 1 employer for purposes of the preceding sentence. “(D) Wages.— “(i) In general.— Except as provided in clause (ii), the term ‘wages’ has the meaning given to such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section). For purposes of the preceding sentence, such subsection (b) shall be applied as if the term United States’ included all possessions of the United States. “(ii) Special rule for agricultural labor and railway labor.— In any case to which subparagraph (A) or (B) of paragraph (1) of section 51(h) applies, the term ‘wages’ has the meaning given to such term by section 51(n)(2). “(2) Allocable employee fringe benefit expenses.— “(A) In general.— The allocable employee fringe benefit expenses of any possession corporation for any taxable year is an amount which bears the same ratio to the amount determined under subparagraph (B) for such taxable year as— “(i) the aggregate amount of the possession corporation’s qualified possession wages for such taxable year, bears to “(ii) the aggregate amount of the wages paid or incurred by such possession corporation during such taxable year. In no event shall the amount determined under the preceding sentence exceed 15 percent of the amount referred to in clause (i). “(B) Expenses taken into account.— For purposes of subparagraph (A), the amount determined under this subparagraph for any taxable year is the aggregate amount 107 STAT. 492allowable as a deduction under this chapter to the possession corporation for such taxable year with respect to— “(i) employer contributions under a stock bonus, pension, profit-sharing, or annuity plan, “(ii) employer-provided coverage under any accident or health plan for employees, and “(iii) the cost of life or disability insurance provided to employees. Any amount treated as wages under paragraph (1)(D) shall not be taken into account under this subparagraph. “(3) Treatment of possession taxes.— “(A) Amount of credit for possession corporations not using profit split.— “(i) In general.— For purposes of subsection (a)(4)(A)(iii), the amount of the qualified possession income taxes for any taxable year allocable to nonsheltered income shall be an amount which bears the same ratio to the possession income taxes for such taxable year as— “(I) the increase in the tax liability of the possession corporation under this chapter for the taxable year by reason of subsection (a)(4)(A) (without regard to clause (iii) thereof), bears to “(II) the tax liability of the possession corporation under this chapter for the taxable year determined without regard to the credit allowable under this section. “(ii) Limitation on amount of taxes taken into account.— Possession income taxes shall not be taken into account under clause (i) for any taxable year to the extent that the amount of such taxes exceeds 9 percent of the amount of the taxable income for such taxable year. “(B) Deduction for possession corporations using profit split.— Notwithstanding subsection (c), if a possession corporation is not described in subsection (a)(4)(A)(iii) for the taxable year, such possession corporation shall be allowed a deduction for such taxable year in an amount which bears the same ratio to the possession income taxes for such taxable year as— “(i) the increase in the tax liability of the possession corporation under this chapter for the taxable year by reason of subsection (a)(4)(A), bears to “(ii) the tax liability of the possession corporation under this chapter for the taxable year determined without regard to the credit allowable under this section. In determining the credit under subsection (a) and in applying the preceding sentence, taxable income shall be determined without regard to the preceding sentence. “(C) Possession income taxes.— For purposes of this paragraph, the term ‘possession income taxes’ means any taxes of a possession of the United States which are treated as not being income, war profits, or excess profits taxes paid or accrued to a possession of the United States by reason of subsection (c). “(4) Depreciation rules.— For purposes of this section— 107 STAT. 493 “(A) Depreciation allowances.— The term ‘depreciation allowances’ means the depreciation deductions allowable under section 167 to the possession corporation. “(B) Categories of property.— “(i) Qualified tangible property.— The term ‘qualified tangible property’ means any tangible property used by the possession corporation in a possession of the United States in the active conduct of a trade or business within such possession. “(ii) Short-life qualified tangible property.— The term ‘short-life Qualified tangible property’ means any qualified tangible property to which section 168 applies and which is 3-year property or 5-year property for purposes of such section. “(iii) Medium-life qualified tangible property.— The term ‘medium-life qualified tangible property’ means any qualified tangible property to which section 168 applies and which is 7-year property or 10-year property for purposes of such section. “(iv) Long-life qualified tangible property.— The term ‘long-life qualified tangible property’ means any qualified tangible property to which section 168 applies and which is not described in clause (ii) or (iii). “(v) Transitional rule.— In the case of any qualified tangible property to which section 168 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applies, any reference in this paragraph to section 168 shall be treated as a reference to such section as so in effect. “(5) Election to compute credit on consolidated basis.— “(A) In general.— Any affiliated group may elect to treat all possession corporations which would be members of such group but for section 1504(b) (3) or (4) as 1 corporation for purposes of this section. The credit determined under this section with respect to such 1 corporation shall be allocated among such possession corporations in such manner as the Secretary may prescribe. “(B) Election.— An election under subparagraph (A) shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. “(6) Possession corporation.— The term ‘possession corporation’ means a domestic corporation for which the election provided in subsection (a) is in effect.” (c) Minimum Tax Treatment.— (1) In general.— Subclause (I) of section 56(g)(4)(C)(ii) (relating to special rule for certain dividends) is amended by striking “sections 936 and 921” and inserting “sections 936 (including subsections (a)(4) and (i) thereof) and 921”. (2) Treatment of foreign taxes.— Clause (iii) of section 56(g)(4)(C) is amended by adding at the end thereof the following subclauses: “(IV) Separate application of foreign tax credit limitations.— In determining the alternative minimum foreign tax credit, section 904(d) 107 STAT. 494shall be applied as if dividends from a corporation eligible for the credit provided by section 936 were a separate category of income referred to in a subparagraph of section 904(d)(1). “(V) Coordination with limitation on 936 credit.— Any reference in this clause to a dividend received from a corporation eligible for the credit provided by section 936 shall be treated as a reference to the portion of any such dividend for which the dividends received deduction is disallowed under clause (i) after the application of clause (ii)(I).” (d) Conforming Amendment.— Paragraph (4) of section 904(b) is amended by inserting before the period at the end thereof the following: “(without regard to subsections (a)(4) and (i) thereof)”. (e) Increase in Limitation on Cover Over.— Paragraph (1) of section 7652(f) is amended to read as follows: “(1) $10.50 ($11.30 in the case of distilled spirits brought into the United States during the 5-year period beginning on October 1, 1993), or.” (f) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1993; except that the amendment made by subsection (e) shall take effect on October 1, 1993.