TERMINATION OF PUERTO RICO AND POSSESSION TAX CREDIT.

SEC. 1601. TERMINATION OF PUERTO RICO AND POSSESSION TAX CREDIT. (a) In General.— Section 936 is amended by adding at the end the following new subsection: “(j) Termination.— “(1) In general.— Except as otherwise provided in this subsection. this section shall not apply to any taxable year beginning after December 31, 1995. “(2) Transition rules for active business income credit.— Except as provided in paragraph (3)— “(A) Economic activity credit.— In the case of an existing credit claimant— “(i) with respect to a possession other than Puerto Rico, and “(ii) to which subsection (a)(4)(B) does not apply, the credit determined under subsection (a)(1)(A) shall be allowed for taxable years beginning after December 31, 1995, and before January 1, 2002. “(B) Special rule for reduced credit.— “(i) In general.— In the case of an existing credit claimant to which subsection (a)(4)(B) applies, the credit determined under subsection (a)(1)(A) shall be allowed for taxable years beginning after December 31, 1995, and before January 1, 1998. “(ii) Election irrevocable after 1997.— An election under subsection (a)(4)(B)(iii) which is. in effect for the taxpayer’s last taxable year beginning before 1997 may not be revoked unless it is revoked for the taxpayer’s first taxable year beginning in 1997 and all subsequent taxable years. “(C) Economic activity credit for puerto rico.— “For economic activity credit for Puerto Rico, see section 30A. “(3) Additional restricted credit.— “(A) In general.— In the case of an existing credit claimant— “(i) the credit under subsection (a)(1)(A) shall be allowed for the period beginning with the first taxable year after the last taxable year to wbich subparagraph (A) or (B) of paragraph (2), whichever is appropriate, applied and ending with the last taxable year beginmng before January 1, 2006, except that “(ii) the aggregate amount of taxable income taken into account under subsection (a)(1)(A) for any such taxable year shall not exceed the adjusted base period income of such claimant. “(B) Coordination with subsection (a)(4).— The amount of income described in subsection (a)(1)(A) which is taken into account in applying subsection (a)(4) shall be such income as reduced under this paragraph. “(4) Adjusted base period income.— For purposes of paragraph (3)— 110 STAT. 1828 “(A) In general.— The term ‘adjusted base period income’ means the average of the inflation-adjusted possession incomes of the corporation for each base period year. “(B) Inflation-adjusted possession income.— For purposes of subparagraph (A), the inflation-adjusted possession income of any corporation for any base period year shall be an amount equal to the sum of— “(i) the possession income of such corporation for such base period year, plus “(ii) such possession income multiplied by the inflation adjustment percentage for such base period year. “(C) Inflation adjustment percentage.— For purposes of subparagraph (B), the inflation adjustment percentage for any base period year means the percentage (if any) by which— “(i) the CPI for 1995, exceeds “(ii) the CPI for the calendar year in which the base period year for which the determination is being made ends. For purposes of the preceding sentence, the CPI for any calendar year is the CPI (as defined in section 1(f)(5)) for such year under section 1(f)(4). “(D) Increase in inflation adjustment percentage for growth during base years.— The inflation adjustment percentage (determined under subparagraph (C) without regard to this subparagraph) for each of the 5 taxable years referred to in paragraph (5)(A) shall be increased by— “(i) 5 percentage points in the case of a taxable year ending during the 1-year period ending on October 13, 1995; “(ii) 10.25 percentage points in the case of a taxable year ending during the 1-year period ending on October 13, 1994; “(iii) 15.76 percentage points in the case of a taxable year ending during the 1-year period ending on October 13, 1993; “(iv) 21.55 percentage points in the case of a taxable year ending during the 1-year period ending on October 13, 1992; and “(v) 27.63 percentage points in the case ofa taxable year ending during the 1-year period ending on October 13, 1991. “(5) Base period year.— For purposes of this subsection— “(A) In general.— The term ‘base period year’ means each of 3 taxable years which are among the 5 most recent taxable years of the corporation ending before October 14, 1995, determined by disregarding— “(i) one taxable year for which the corporation had the largest inflation-adjusted possession income, and “(ii) one taxable year for which the corporation had the smallest inflation-adjusted possession income. “(B) Corporations not having significant possession income throughout 5-year period.— “(i) In general.— If a corporation does not have significant possession income for each of the most110 STAT. 1829 recent 5 taxable years ending before October 14, 1995, then, in lieu of applying subparagraph (A), the term ‘base period year’ means only those taxable years (of such 5 taxable years) for which the corporation has significant possession income; except that, if such corporation has significant possession income for 4 of such 5 taxable years, the rule of subparagraph (A)(ii) shall apply. “(ii) Special rule.— If there is no year (of such 5 taxable years) for which a corporation has significant possession income— “(I) the term ‘base period year’ means the first taxable year ending on or after October 14, 1995, but “(II) the amount of possession income for such year which is taken into account under paragraph (4) shall be the amount which would be determined if such year were a short taxable year ending on September 30, 1995. “(iii) Significant possession income.— For purposes of this subparagraph, the term ‘significant possession income’ means possession income which exceeds 2 percent of the possession income of the taxpayer for the taxable year (of the period of 6 taxable years ending with the first taxable year ending on or after October 14, 1995) having the greatest possession income. “(C) Election to use one base period year.— “(i) In general.— At the election of the taxpayer, the term ‘base period year’ means— “(I) only the last taxable year of the corporation ending in calendar year 1992, or “(II) a deemed taxable year which includes the first ten months of calendar year 1995. “(ii) Base period income for 1995.— In determining the adjusted base period income of the corporation for the deemed taxable year under clause (i)(II), the possession income shall be annualized and shall be determined without regard to any extraordinary item. “(iii) Election.— An election under this subparagraph by any possession corporation may be made only for the corporation’s first taxable year beginning after December 31, 1995, for which it is a possession corporation. The rules of subclauses (II) and (III) of subsection (a)(4)(B)(iii) shall apply to the election under this subparagraph. “(D) Acquisitions and dispositions.— Rules similar to the rules of subparagraphs (A) and (B) of section 41(t)(3) shall apply for purposes of this subsection. “(6) Possession income.— For purposes of this subsection, the term ‘possession income’ means, with res!lect to any possession, the income referred to in subsection (a)(1)(A) determined with respect to that possession. In no event shall possession income be treated as being less than zero. “(7) Short years.— If the current year or a base period year is a short taxable year, the application of this subsection110 STAT. 1830 shall be made with such annualizations as the Secretary shall prescribe. “(8) Special rules for certain possessions.— “(A) In general.— In the case of an existing credit claimant with respect to an applicable possession, this section (other than the preceding paragraphs of this subsection) shall apply to such claimant with respect to such applicable possession for taxable years beginning after December 31, 1995, and before January 1, 2006. “(B) Applicable possession.— For purposes of this paragraph, the term ‘applicable possession’ means Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. “(9) Existing credit claimant.— For purposes of this subsection— “(A) In general.— The term ‘existing credit claimant’ means a corporation— “(i) (I) which was actively conducting a trade or business in a possession on October 13, 1995, and “(II) with respect to which an election under this section is in effect for the corporation’s taxable year which includes October 13, 1995, or “(ii) which acquired all of the assets of a trade or business of a corporation which— “(I) satisfied the requirements of subclause (I) of clause (i) with respect to such trade or business, and “(II) satisfied the requirements of subclause (II) of clause (i). “(B) New lines of business prohibited.— lf, after October 13, 1995, a corporation which would (but for this subparagraph) be an existing credit claimant adds a substantial new line of business (other than in an acquisition described in subparagraph (A)(ii)), such corporation shall cease to be treated as an existing credit claimant as of the close of the taxable year ending before the date of such addition. “(C) Binding contract exception.— If, on October 13, 1995, and at all times thereafter, there is in effect with respect to a corporation a binding contract for the acquisition of assets to be used in, or for the sale of assets to be produced from, a trade or business, the corporation shall be treated for purposes of this paragraph as actively conducting such trade or business on October 13, 1995. The preceding sentence shall not apply if such trade or business is not actively conducted before January 1, 1996. “(10) Separate application to each possession.— For purposes of determining— “(A) whether a taxpayer is an existing credit claimant, and “(B) the amount of the credit allowed under this section, this subsection (and so much of this section as relates to this subsection) shall be applied separately with respect to each possession.”. (b) Economic Activity Credit for Puerto Rico.— 110 STAT. 1831 (1) In general.— Subpart B of prui; IV of subchapter A of chapter 1 is amended by adding at the end the following new section: “SEC. 30A. PUERTO RICAN ECONOMIC ACTIVITY CREDIT. “(a) Allowance of Credit.— “(1) In general.— Except as otherwise provided in this section, if the conditions of both paragraph (1) and paragraph (2) of subsection (b) are satisfied with respect to a qualified domestic corporation, there shall be allowed as a credit against the tax imposed by this chapter an amount equal to the portion of the tax which is attributable to the taxable income, from sources without the United States, from— “(A) the active conduct of a trade or business within Puerto Rico, or “(B) the sale or exchange of substantially all of the assets used by the taxpayer in the active conduct of such trade or business. In the case of any taxable year beginning after December 31, 2001, the aggregate amount of taxable income taken into account under the preceding sentence (and in applying subsection (d)) shall not exceed the adjusted base period income of such corporation, as determined in the same manner as under section 936(j). “(2) Qualified domestic corporation.— For purposes of paragraph (1), the term ‘qualified domestic corporation’ means a domestic corporation— “(A) which is an existing credit claimant with respect to Puerto Rico, and “(B) with respect to which section 936(a)(4)(B) does not apply for the taxable year. “(3) Separate application.— For purposes of determining— “(A) whether a taxpayer is an existing credit claimant with respect to Puerto Rico, and “(B) the amount of the credit allowed under this section, this section (and so much of section 936 as relates to this section) shall be applied separately with respect to Puerto Rico. “(b) Conditions Which Must Be Satisfied.— The conditions referred to in subsection (a) are— “(1) 3-year period.— If 80 percent or more of the gross income of the qualified domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession (determined without regard to section 904(f)). “(2) Trade or business.— If 75 percent or more of the gross income of the qualified domestic corporation for such period or such part thereof was derived from the active conduct of a trade or business within a possession. “(c) Credit Not Allowed Against Certain Taxes.— The credit provided by subsection (a) shall not be allowed against the tax imposed by— “(1) section 59A (relating to environmental tax), 110 STAT. 1832 “(2) section 531 (relating to the tax on accumulated earnings), “(3) section 541 (relating to personal holding company tax), or “(4) section 1351 (relating to recoveries of foreign expropriation losses). “(d) Limitations on Credit for Active Business Income.— The amount of the credit determined under subsection (a) for any taxable year shall not exceed the sum of the following amounts: “(1) 60 percent of the sum of— “(A) the aggregate amount of the qualified domestic corporation’s qualified possession wages for such taxable year, plus “(B) the allocable employee fringe benefit expenses of the qualified domestic corporation for such taxable year. “(2) The sum of— “(A) 15 percent of the depreciation allowances for the taxable year with respect to short-life qualified tangible property, “(B) 40 percent of the depreciation allowances for the taxable year with respect to medium-life qualified tangible property, and “(C) 65 percent of the depreciation allowances for the taxable year with respect to long-life qualified tangible property. “(3) If the qualified domestic corporation does not have an election to use the method described in section 936(h)(5)(C)(ii) (relating to profit split) in effect for the taxable year, the amount of the qualified possession income taxes for the taxable year allocable to nonsheltered income. “(e) Administrative Provisions.— For purposes of this title— “(1) the provisions of section 936 (including any applicable election thereunder) shall apply in the same manner as if the credit under this section were a credit under section 936(a)(1)(A) for a domestic corporation to which section 936(a)(4)(A) applies, “(2) the credit under this section shall be treated in the same manner as the credit under section 936, and “(3) a corporation to which this section applies shall be treated in the same manner as if it were a corporation electing the application of section 936. “(f) Definitions.— For purposes of this section, any term used in this section which is also used in section 936 shall have the same meaning given such term by section 936. “(g) Application of Section.— This section shall apply to taxable years beginning after December 31, 1995, and before January 1, 2006.”. (2) Conforming Amendments.— (A) Paragraph (1) of section 55(c) is amended by striking “and the section 936 credit allowable under section 27(b)” and inserting “, the section 936 credit allowable under section 27(b), and the Puerto Rican economic activity credit under section 30A”. (B) Subclause (I) of section 56(g)(4)(C)(ii) is amended— (i) by inserting “30A,” before “936”, and (ii) by striking “and (i)” and inserting “, (i), and (j)”. 110 STAT. 1833 (C) Clause (iii) of section 56(g)(4)(C) is amended by adding at the end the following new subclause: “(VI) Application to section 30a corporations.— References in this clause to section 936 shall be treated as including references to section 30A.”. (D) Subsection (b) of section 59 is amended by striking “section 936,” and all that follows and inserting “section 30A or 936, alternative minimum taxable income shall not include any income with respect to which a credit is determined under section 30A or 936.”. (E) The table of sections for subpart B of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item: “Sec. 30A. Puerto Rican economic activity credit.”. (F) (i) The heading for subpart B of part IV of subchapter A of chapter 1 is amended to read as follows: “Subpart B— Other Credits”. (ii) The table of subparts for part IV of subchapter A of chapter 1 is amended by striking the item relating to subpart Band inserting the following new item: “Subpart B. Other credits.”. (c) Effective Date.— (1) In general.— Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1995. (2) Special rule for qualified possession source investment income.— The amendments made by this section shall not apply to qualified possession source investment income received or accrued before July 1, 1996, without regard to the taxable year in which received or accrued. (3) Special transition rule for payment of estimated tax installment.— In determining the amount of any installment due under section 6655 of the Internal Revenue Code of 1986 after the date of the enactment of this Act and before October 1, 1996, only ½ of any increase in tax (for the taxable year for which such installment is made) by reason of the amendments made by subsections (a) and (b) shall be taken into account. Any reduction in such installment by reason of the preceding sentence shall be recaptured by increasing the next required installment for such year by the amount of such reduction.