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TitleThe Operation and Effect of the Possessions Corporation System of Taxation
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Document Text Contents
Page 1

, The Operation and Effect
of the Pcissessions Corporation

System of Tax a ti on

Fifth Report

Department of the Treasury
July 1985

Page 2

THE OPERATION AND EFFECT OF THE

POSSESSIONS CORPORATION SYSTEM OF TAXATION

FIFTH REPORT

DEPARTMENT OF THE TREASURY

JOLY 1985

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402

Page 61

0

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percent through this period. The share of the electrical and
electronics industry varied between 15 percent and 20 percent in
most years, except 1981, when it rose to 26 percent; in 1982 it
amounted to 22 percent.

The estimated U.S. tax benefits of possessions corporations
increased from $400 million in tax year 1974 to about $1.7 billion
in tax year 1982, a change in inflation-corrected dollars of 255
percent.

The U.S. tax benefits in relation to the number of employees in
l. n possess ions corporations rose from about $6, 300 per employee

1974 to $20,650 per employee in 1982.

Despite the increase in the average compensation paid by 936
companies (from $6,973 in 1974 to $14,070 in 1982) tax benefits
rose from 92 percent to 147 percent of average employee
compensation in this period.

Estimates of Linkages

The preceding sections related the tax benefits of the possessions
corporation system of taxation to the employment and payroll of 936
companies. In addition to creating jobs directly, the new industn'
encouraged by this system of taxation may bring indirect benefits t~
Puerto Rico. The development of one industry may encourage the grow~
of other industries that are users of the products which . 1 t
manufactures, a phenomenon cal led "forward 1 inkages." Manufactur ~n9
also gives rise to "backward (supplier) linkages." Product1°~
requires raw materials, intermediate goods, and services, a portion ~
which are supplied by the local economy; and investment in plant 10

Puerto Rico creates jobs in the construction industry.

A. Forward Linkages. "Forward linkages" are usually evaluated bY
examining the percentage of total sales to various types of customers;
When one industry sells a substantial part of its output to anothe
local industry, it is plausible that forward linkages have occurref)
Conversely, where an industry produces a consumer good (e.g., apparehe
or where it sells most of its output abroad, it is unlikely that t 1
industry is an important stimulant to the development of 1oca
"downstream" (customer) industries.

The latest year for which Census data on the destination of puer~~
Rican shipments are available is 1977. Table 4-10 shows the percen
ages of manufacturing ind us tries' shipments in 1977 to Puerto Ric~~
the United States, and foreign countries, respectively, but does 0 t 0
distinguish between sales to individual consumers and sale~ ct
manufacturers. For manufacturing as a whole, 33~ 4 percent of a1 r?09
shipments went to Puerto Rico, 59.2 percent to buyers (includ~ 0
parent companies) in the United States, and 7. 4 percent to fore 1Js
purchasers. If indirect shipments outside of Puerto Rico (i.e., gooto
sold to other Puerto Rican manufacturers who, in turn, sold them

1
,

the United States or foreign countries) could be estimated separate rd
Puerto Rico's sales to the United States and foreign markets wou
appear larger than Table 4-10 indicates.

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Table 4-10

Destination of Shipments by Puerto Rican
Manufacturing Industries, 1977

(Percentage of total)

Industry Puerto United
Groue Rico Statesl/

All Manufacturing Industries 33.4% 59.2%
Food and kindred products 55.l 39.2
Tobacco products 45.3 54.7
Textile mill products 27.8 72.2
Apparel 18.6 76.3
Lumber and wood products 100.0
Furniture and fixtures 87.1 12.2
Paper and allied products 87. 6 4.0
Printing and publishing 53.8 44.4
Chemicals 9.2 74.2

Drugs 1.6 71. 2
Petroleum refining 68.9 28.7
Rubber products 20.0 79.8
Leather and leather products 2.5 97.2
Stone, clay and glass products 83.8 15.3
Primary metal industries 49.l 34.0
Fabricated metal products 76.5 20.9
Machinery except electrical 27.8 71. 7
Electrical and electronic equipment 7.3 84.8
Transportation equipment 9.1 84.6
Instruments and related products .4 95.4
Miscellaneous manufacturing

industries 3.4 95.2

Off ice of the Secretary
Off ice of Tax Analysis

Foreign
Countries

7.4%
5.8
*
*
*
*
8.2
1. 7

16.6
27.2

2.4
.5
.1
.8

16.9
2.5
.5
.8

6.2
4.1

1.1

Source: U.S. Department of Commerce, 1977 Economic Censuses of
Outlying Areas, Manufactures, Puerto Rico, November 1980,
Chapter 2, Table 3.

y

*

Figures for shipments to the United States represent direct
exports by Puerto Rican manufacturing establishments to the United
States and the U.S. Virgin Islands.

Less than 0.05 percent.

Page 122

Form 940 (1982) Page 4
l:ttil'M Computation of Tentative Credit (Complete if You Checked the "No" Box in Either Question A or Bon Page 1-See Instructions)

State Contributions if Contributions pay- Add itional cred it
State reporting number(s) State experience rate period Contributions Taxable payroll experi- rate had been able at experience (col . 6 minus Name of State as shown on employer's 2.7% (col. rate (col. col. 7) If 0 or

actually pa id
(as defined in State act) 4 ence State contribution returns to State 3X2.7%) 3xcol. 5) less, enter 0. rate

1 2 3 From- To- 5 6 7 8 9

-------------------------------------------1---------1
~~llll#M'~#~, __ __;.., __ 10 Totals . . ....

11 Total tentative credit (add line 10, columns 8 and 9-see instructions for limitations) . . .... -
to temporary or part-time employees, and
the value of goods, lodging, food, and cloth·
ing. Enter the amount before any deductions.

How the payments are made is not im-
portant in determining if they are wages.
Thus, you may pay wages for piecework or
as a percentage of profits, and you may pay
wages hourly, daily, weekly, monthly, or
yearly. You may pay wages in cash or some
other way, such as goods, lodging, food, or
clothing. For items other than cash, use the
fair market value at the time of payment.

Line 2-Exempt payments.-"Wages"
and "employment" as defined for FUTA pur-
poses do not include every payment and
every kind of service an employee may per-
form. In general, payments excluded from
wages and payments for services excepted
from employment are not subject to tax. You
may deduct these payments from total pay-
ments only if you explain them on line 2.

Enter such items as the following:
(1) Agricultural labor if you (a) paid cash

wages of less than $20,000 for such labor
for each calendar quarter in 1981 and 1982
AND did not employ 10 or more farmwork-
ers during any part of a day during any
20 different weeks in 1981 or 1982, (b)
paid wages to aliens admitted to the United
States on a temporary basis to perform
farmwork before 1984.

(2) Benefit payments for sickness or in-
jury under a worker's compensation law,
insurance plan, and certain employer plans.

(3) Household service if you paid cash
wages of less than $1,000 in each calendar
quarter in 1981 and 1982.

(4) Certain family employment.
(5) Certain fishing activities.
(6) Non-cash payments for farm work or

household services in a private home that
are included on line 1. Only cash wages to
these workers are taxable.

(7) Value of certain meals and lodging.
(8) Any other exempt service or pay.
For more detailed information, see Circu-

lar E, Employer's Tax Guide.

Line 3.-Enter the total of the amounts
you paid each employee in excess of $6,000.
For example, if you have 10 employees
whom you paid $8,000 each during the year,
enter $80,000 on line 1 and $20,000 on line
3. The $6,000 wage limitation is for FUTA
purposes only. Do not use the State wage
limitation for this entry.

Line 5-Total taxable wages.-lf any part
of these wages is exempt from State unem-
ployment taxes, you must fill out Parts II I
and V, even if you checked questions A and
8 "Yes."

Line 6.-Enter any wages included on line
~ subject to the unemployment compensa-
tion laws of Arkansas, Connecticut Dela-
ware, District of Columbia, lllinofs, 'Maine,

Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania , Puerto Rico, Rhode Island,
Vermont, Virgin Islands, or West Virginia. (If
in doubt, ask your local IRS office.) Multiply
the wages by the appropriate rate. This ad-
justment is required by Internal Revenue
Code section 3302(c)(2). If no wages are
subject, enter "none" on line 7.

Part 11.-Tax Due or Refund
Use this part if you made payments to only one

State by the due date of Form 940, and all your
wages shown on line 5 of Part I are subject to the
State's unemployment fund taxes. The tax rate of
.007 gives you credit for your payments to your
State's unemployment fund.

Part 111.-Tax Due or Refund
Use this part if you do not qualify for Part II.

Line 3.-Enter the smaller of (1) line 11 ,
Part V-Total tentative credit, or (2) line 2,
Part 111-2.7% of taxable FUTA wages. This
is the maximum credit allowable for your
payments to the State unemployment fund .

Line 4.-Enter the amount from line 7,
Part I. Subtract this amount from line 3,
Part Ill. The result on line 5 is your allowable
credit for payments to the State.

Part IV.-Record of Federal Tax liability
Complete this part if your total tax (line

3, Part II or line 6, Part Ill) ·is over $100. To
figure your FUTA tax liability for each of the
first 3 quarters of 1982, multiply by .007
that part of the first $6,000 of each em -
ployee's annual wages you paid during the
quarter. Enter this amount under that quar-
ter.

Your liability for the 4th quarter is the
total tax (line 3, Part II or line 6, Part Ill)
minus amounts deposited for the year. If
this is over $100, deposit the entire amount
by January 31 in a qualified depositary. If it
is $100 or less, you can either make a de·
posit or pay it with your Form 940 by
January 31.

The total liability must equal your total
tax. Otherwise, you may be assessed a fail-
ure to deposit penalty computed on your
average liability.

If the amount subject to deposit (plus any
undeposited amount of $100 or less for any
earlier quarter) is more than $100, deposit it
by the last day of the first month following
the close of the quarter.

If you deposited the proper amounts, fol-
lowing these rules, the balance due with
Form 940 will never be more than $100.

Deposit Federal unemployment tax in an
authorized financial institution or the Fed-
eral Reserve bank for your area according
to the instructions on the back of a prein-
scribed Federal Tax Deposit (FTD) Form 508
which must accompany each deposit.

Preinscribed FTD Forms 508 are mailed
to yo'u·around the end of March for your use

throughout the year. The number of cards
you receive is based on your history of pat
rnents during the previous two years. If yo~
do not r~ceive a supply of cards or nee
more than the number sent to you, you can
order cards by telephoning the toll-free IRS
number for your area or by writing the serv·
ice Center where you file Form 940. Your re·
quest should show your name, address, erri·
player identification number, the kind of ta~
(FUTA), the tax period ending date (Dece~·
ber 31), and the number of cards you nee ·

Taxpayers who willfully claim credit f0J
deposits not made are subject to fines an
other criminal penalties.

Part V.-Computation of Tentative Credit
Com~lete this schedule if: (1) You made payme~ts.

to the unemployment fund of more than one Sta~~
(2) You did not make your State payments by t

0
due date of Form 940; or (3) Any wages subject te
Federal unemployment tax were exempted from state
unemployment taxes .. If you have a State experience
rate lower than 2. 7% for all or part of the year, us
columns 1 through 9. If you have no experience ratef
use columns 1, 2, 3, and 9 only. If you have a rate 0

2.7% or higher, use columns 1, 2, 3, 4, 5, and 9 onl~
If you were granted an experience rate for only par
of the year or the rate was changed during the ye~h
enter in the appropriate columns the period ea e·
separate rate applied to, your payroll rate, and r
qu ired contributions for each period.

Column 1.-Enter the name of the sta~
or States (including Puerto Rico and the U. y
Virgin Islands) that you were required to pa
contributions to.

Column 2.-Enter the State report i~~
number that was assigned to you when Yte·
registered as an employer with your Sta

Column 3.-Enter the taxable payroll t~~i
you must pay taxes on to the unemployrn e·
fund of the State in column 1. If your ef Pof
rience rate is zero, enter the amoun n if
wages that you would have had to pay 0
the rate had not been granted.

. nee
Columns 4 and 5.-Your State expene

0
ur

rate is the rate at which the State taxes YseS·
payroll for State unemployment purp~· fl'l e
This rate may be adjusted from t ime to ~ate
based on your "experience" with the Sent
fund, that is, claims for unemployrriees
compensation by your former emploY 01J(
and other factors. If you do not know YritY
rate, contact your State employment secLJ
agency. I·

. co
Column 8.-Subtract the amount '" nte'

umn 7 from column 6. If zero or less, e
''O." .

t (I'
Column 9.-Enter the amount of co~

butions actually paid into the State fun ·
0 • 1 I

Line 11.-Add the total of 11ne.t fo'
columns 8 and 9 . The allowable cred1 dLle
State contributions you make att~r: theForf11
date (or extended due date) for f1l1ng redit
940 may not be more than 90% of the c ~ad
that would have been allowed if you date·
paid the State contributions by the due

z6J5
* U.S. GOVERNMENT PRINTI NG OFFICE: 1985- 481 - 787')

Page 123

Department of the Treasury
Washington, D.C. 20220

Official Business
Penalty for Private Use, $300

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