Question

Discuss your position on the following concerning Section 936 of the Internal Revenue Code: The 936 companies were criticized for arguing that they only defended their tax benefits without supporting local development as a research and high-tech center.

Answer 1

What is Revenue code 936?

Section 936 of the Internal Revenue Code was a measure by the U.S. federal government to encourage U.S. corporations to invest in Puerto Rico by providing an exemption from federal taxes. The measure promoted the banking and finance industries, as well as manufacturing, mainly pharmaceutical and electronics companies.

Since the execution of Section 936 joblessness in Puerto Rico has increased, from about 15% to around 20%. This has occurred despite the fact that migration has accelerated. Between 1977-1988, around 25,600 people left the island annually. This is the highest rate of migration since the beginning of Operation Bootstrap.

Exceeding profits have been obtained by high-tech, capital intensive companies (like those in pharmaceuticals, scientific instruments, electronics, and electrical machinery). For instance, only seventy-seven of the 500 companies benefiting from this tax incentive are pharmaceuticals, yet that single industry obtains half of the total 936 tax savings. The financial and political clout of pharmaceuticals in Puerto Rico is disproportionate, especially given the relatively few jobs they create.

A number of pro-936 lobbying organizations have argued—through publicity campaigns in the mass media and with politicians in Washington—that Section 936 is vital to the profitability of U.S. corporations operating in Puerto Rico, to the workers who are employed there and to the overall health of the economy. However, a closer analysis reveals that Section 936 has essentially become a tax loophole available to the accountants and planners of U.S.-owed corporations. While it has increased their profits, it has not proven to be an effective job-creating mechanism.