USE OF SECTION 936 FUNDS FOR LOANS IN THE CARIBBEAN REGION TUESDAY, APRIL 3, 1990 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON OVERSIGHT, Washington, D.C. The subcommittee met, pursuant to notice, at 9:36 a.m., in room 1100 Longworth House Office Building, Hon. J.J. Pickle (chairman of the subcommittee) presiding. [The press release announcing the hearing follows:] (1) FOR IMMEDIATE RELEASE PRESS RELEASE #25 SUBCOMMITTEE ON OVERSIGHT COMMITTEE ON WAYS AND MEANS WASHINGTON, D.C. 20515 THE HONORABLE J. J. PICKLE (D., TEXAS), CHAIRMAN, ANNOUNCES A HEARING ON THE USE OF SECTION 936 FUNDS FOR The Honorable J. J. Pickle (D., Texas), Chairman of the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, announced today that the Subcommittee will hold a hearing to review the use of funds held by Puerto Rican financial institutions, pursuant to Section 936 of the Internal Revenue Code, to fund investments in active business assets and development projects in the Caribbean region. The hearing has been scheduled for Tuesday, April 3, 1990, beginning at 9:30 a.m., in the main Committee hearing room, 1100 Longworth House Office Building. Witnesses invited to appear at the hearing include representatives of the Department of the Treasury, the Government of Puerto Rico, eligible Caribbean Basin Initiative (CBI) countries, associations representing U.S. corporations doing business in Puerto Rico, and banks holding "936 funds" in Puerto Rico. Section 936 allows U.S. corporations doing business in profits they earn in Puerto Rico. In 1984, the Department of the In announcing the hearing, Chairman Pickle stated: "There are $10-$15 billion in tax-free investments by U.S. corporations in Puerto Rico taking advantage of Section 936. Prior to 1987, tax-free income on invested profits from Puerto Rican operations could be derived only from sources inside Puerto Rico. In the Tax Reform Act of 1986, however, the Congress amended the law to allow for tax-free treatment of investments of 936 funds outside Puerto Rico. This change in the law was made to enable Puerto Rico to implement its proposed Caribbean loan initiative. In this initiative, Puerto Rico proposed to use loans of low-interest 936 funds to increase investment and employment in qualified CBI countries. "Both the House and Senate Committee reports accompanying the Tax Reform Act of 1986 describe the importance of Congressional oversight to review the operation of Section 936. The amendment to Section 936 has been in place now for over three years. It's time Congress takes a look at what has happened in the CBI region, through December 31, 1989, and to date, as a result of the Caribbean loan initiative. At the Subcommittee hearing, we will determine how much in 936 funds has been in fact made available in loans to eligible CBI countries, exactly how that money has been used, and whether the program is effective or changes should be made." -2 DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: Interested parties are urged to submit written comments. Persons submitting written comments for the printed record of the hearing should submit six (6) copies by the close of business, Friday, May 4, 1990, to Robert J. Leonard, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Room 1102 Longworth House Office Building, Washington, D.C. 20515. Parties interested in making copies of their written statement available to the Subcommittee and the public at the hearing should submit 100 copies of their written statement, as outlined above, by the close of business, Friday, March 30, 1990. FORMATTING REQUIREMENTS: Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will aut be printed, but will be maintained in the Committee files for review and use by the Committee. 1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages. 2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee. 3. Statements must contain the name and capacity in which the witness will appear or, for written comments the name and capacity of the person submitting the statement, as well as any clients or persons, or any organization for whom the witness appears or for whom the statement is submitted. 4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record The above restrictions and limitations apply only to material being submitted for printing Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and public during the course of a public hearing. may be submitted in other forms. Chairman PICKLE. The subcommittee will come to order. Now, that it is 9:36 on the clock, we will now open the section 936 hearing. Our first witness this morning will be our distinguished friend, Ken Gideon with the Treasury Department. But before you proceed, Mr. Gideon, we have a few statements to make up here. So we will make these opening statements by any members who want to make them. The Subcommittee on Oversight meets today as part of its investigation into the implementation by the government of Puerto Rico of the so-called Section 936/CBI loan program. Under present law, U.S. corporations doing business in Puerto Rico receive a credit that eliminates all the U.S. income tax on the profits they earn there. The credit applies not only to the profits they earn from conducting business, but also to investment income from funds they retain and invest in Puerto Rico. These invested funds are referred to as 936 funds. The section 936 tax credit creates a Federal revenue loss of almost $2 billion annually. There are $10 to $15 billion in 936 funds on deposit, or otherwise invested, in Puerto Rico. This is more than the Federal Government spends on elementary education or higher education or the space program. The question before the subcommittee today is, do eligible Caribbean countries have, in fact, meaningful access to these funds as provided for by law and promised by the government of Puerto Rico? Or are there better ways for Puerto Rico to run the Caribbean loan program? Should we look at changes in the section 936 program? During consideration of the Tax Reform Act of 1986, Puerto Rico made a commitment to this committee, to the Senate Finance Committee, and the Department of Treasury, a commitment to guarantee $100 million of new investments annually to the Caribbean Basin Initiative countries. To enable Puerto Rico to implement this commitment we added a new provision to section 936, subsection (d)(4), allowing Puerto Rico financial institutions to make loans for investments in active business assets or development projects in qualified CBI countries. We made this change because we felt that Puerto Rico, the most affluent of the Caribbean islands, had a special responsibility to assist in the economic development of the lessdeveloped CBI countries. Now, I know that many of the members sitting here today clearly recall the_events that took place in early 1985-86. During tax reform, the Department of Treasury proposed, in Treasury I, that section 936 be repealed and replaced with a wage credit. In response, the government of Puerto Rico and the 936 corporations lobbied for retention of 936. In exchange, Puerto Rico promised to implement a program that would make $100 million of 936 funds annually available to the Caribbean region. Both Puerto Rico and the prior administration initiated the 936/CBI program and when the Congress agreed, Puerto Rico became the broker for a big pool of Caribbean development funds. Over 3 years have passed since 936 was amended to allow for the 936/CBI loan program. In the first 3 years since enactment, as of December 31, 1989, loans of 936 funds by Puerto Rican financial institutions to eligible CBI countries totaled only $70 million. In the 3 months prior to this hearing the loan amount has more than dou |