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This article was originally published in The Gray Sheet

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. The proposed revision would permit individual corporations to select one of two alternatives for claiming the limited income- based tax credit. Under one plan, 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 parent, 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. David Pryor (D-Ark.) and William 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 Gray Sheet" Feb. 22, p. 4). Like other tax bills of recent years, the committee-passed measure extends for one year the tax credit for R&D 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 in the Finance Committee bill. Health technology 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 revenue. 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 in the Finance Committee's deficit-reduction mode 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" biotech products. Although the White House has proposed reducing the venture capitalization credit limit from $100 mil. to $50 mil., Feldbaum said that "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. Dale Bumpers (D-Ark.) and Rep. Robert 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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