{
  "id": "R44651",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "R44651",
  "active": true,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 587649,
      "date": "2016-10-07",
      "retrieved": "2020-01-02T15:19:09.714482",
      "title": "Tax Policy and U.S. Territories: Overview and Issues for Congress",
      "summary": "There are 14 U.S. territories, or possessions, five of which are inhabited: Puerto Rico (PR), Guam, U.S. Virgin Islands (USVI), American Samoa (AS), and the Commonwealth of the Northern Mariana Islands (CNMI). Each of these inhabited territories has a local tax system with features that help determine each territory\u2019s local public finances. \nThe U.S. Internal Revenue Code (IRC) has two important roles in establishing the tax policy relationship between the United States and the territories. First, native residents of U.S. territories are U.S. citizens or nationals but are taxed more similar to foreign citizens because income earned from territorial sources is treated like foreign-source income. The IRC also treats U.S. subsidiaries formed in the territories as foreign corporations, which can generally defer U.S. tax on income earned from business or trade in the territories. \nSecond, the IRC serves as the local tax laws in the territories that are required to use a mirror-code system (USVI, Guam, and the CNMI), in which the territory substitutes its name for the \u201cUnited States\u201d to give the IRC the proper effect as the territory\u2019s local income tax system. AS is not bound by the mirror system but has chosen to adopt much of the IRC for its income tax. PR has its own income tax system, which is not based on the IRC.\nThese dynamics between federal and territorial tax policy raise several potential issues for Congress. First, economic development of the territories has been of perennial congressional interest. Tax incentives enacted by the territories and the United States have been shown to direct offshore investment to the territories. With this said, though, economic studies of one broader U.S. tax incentive, the now-repealed Section 936 credit, indicate that any employment effects are usually secondary to the magnitude of effects on shareholder earnings, and average tax benefit for corporations often equaled if not surpassed average compensation per employee. Tax policies that effectively subsidize a more narrow set of industries in certain territories, such as rum production in PR and the USVI and manufacturing in AS, still exist today. \nSecond, federal tax benefits could be used to assist low-income households living in the territories. For example, the Earned Income Tax Credit (EITC) and the additional child tax credit (ACTC) could be expanded to low-income territorial households. The EITC is typically not available to territorial residents and the ACTC is limited to residents of the mirror code territories and certain residents of PR. Although these options could target lower-income households, they could also impose administrative costs for territorial households that are not required to file U.S. tax returns (e.g., because they only have territorial-source income). A payroll tax cut could be administratively simpler (since all territorial residents withhold taxes for some federal payroll taxes), but it would also be less narrowly targeted to lower-income households.\nThird, interactions and differences in tax rates between the U.S. and territorial tax policies also create opportunities for tax arbitrage and avoidance by corporations and certain individuals. For the United States, this tax revenue loss is part of a broader issue with international income and profit shifting. For the territories, the revenue lost from special tax incentives could be used to reform the local tax system, increase spending on social programs, or pay down their debt. Such tax avoidance opportunities can distort the allocation of capital away from locations and industries where investment earns the highest economic rate of return. Additionally, the ability for certain taxpayers to utilize sophisticated tax avoidance strategies could raise issues of fairness. \nThis report summarizes U.S. tax policy related to the territories, including a general discussion of how federal taxes apply to territorial residents and how federal law affects the different territorial tax systems in similar or different ways. This report is not intended to be a comprehensive guide to federal or territorial tax policy or tax law.",
      "type": "CRS Report",
      "typeId": "REPORTS",
      "active": true,
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      "topics": [
        {
          "source": "IBCList",
          "id": 4799,
          "name": "Individual Tax"
        },
        {
          "source": "IBCList",
          "id": 4804,
          "name": "Business & Corporate Taxation"
        },
        {
          "source": "IBCList",
          "id": 4825,
          "name": "International Tax"
        }
      ]
    }
  ],
  "topics": [
    "Economic Policy"
  ]
}