Question

What was the purpose of Section 936 of the tax code?Why wasn’t Puerto Rico able to fight to keep tax brackets in Congress? What were some of the consequences of Section 936 for the Puerto Rico economy? Why were Puerto Rico’s government bonds so attractive despite the economy not doing well?

Answer 1

Purpose of section 936 was to grow economy of Puerto Rico, decrease unemployment and reduce dependence on federal funds, US congress created section 936 in 1976 and its purpose was to encourage US companies subsidiaries to establish their operations in Puerto Rico and repatriate their profits back to US to their parent company without payment of federal taxes and this has benefitted Puerto Rico's economy and there new job were created and Puerto Rican economy got benefitted from this but in order to retain the profits back in Puerto Rico only in order to support new jobs and support to its treasury and further to make Puerto Rico a financial hub, Puerto Rican government has imposed tollgate tax of 10% on US subsidiaries and gave them offer of paying lower tax rate of 5% if they invest in commonwealth bonds, public corporations bonds or if they deposit their money in local banks. This has further helped Puerto Rico to retains earnings of US subsidiaries in Puerto Rico and to grow its economy and its local financial institutions.

Why Puerto Rico was not able to fight to keep tax brackets in Congress ?- It is because section 936 was benefitting mainly the US subsidiaries and not the Puerto Rican economy as such because unemployment level in Puerto Rico was above 11% throughout this period and US subsidiaries's profits were not coming back to US treasury and one more reason was that Research and Development activities were done in US but manufacturing/production was done in Puerto Rico by transfer of patents to its subsidiary company and profits/earnings were becoming tax free and it means US tax payers were subsidising US companies earnings/profits. And one more reason was that it was creating jobless growth.

Section 936 consequences on the Puerto Rico economy- Inspite of section 936 unemployment rate in Puerto Rico was above 11% and US subsidiaries were benefiting more than Puerto Rican economy and the intention of section 936 was not getting fulfilled in true spirit and it was also increasing dependence of Puerto Rican economy's on US support.

Puerto Rico's government bonds are so attractive because they are triple tax exempt bonds since there are exempted from taxes by the US government, by any state, territory, possession, county, municipality, etc. and because of this there is no tax on interest on bonds issued by Puerto Rico government.