the U.S. treasury because no taxes are withheld, creating the
Treasury also cited
opportunity for tax avoidance or evasion.
its general opposition to this method of gaining access to forWhile Treasury supported the general
-@ign capital markets.
objective of
insular economic development,
it stated
that Guam
should not serve as a conduit for transitory foreign investment,
and
should
not receive
a
benefit not available to the states.
The Congress later affirmed Treasury's position with the passage
of the Tax Reform Act of 1984 which effectively eliminated
potential
benefits
of
establishing
an
these types of financial transactions.
intermediary
to
handle
Guam officials said that this is another example of a
federal policy action to prevent the territory from achieving
greater self reliance.
The Governor of Guam, in his February
1984 testimony before the House Interior and Insular Affairs
Committee, called Treasury's action inconsistent because at the
time it granted foreign citizens a privilege denied to U.S.
citizens residing in Guam.
According to the Governor, Guam
would have realized about $50 million in annual revenue had its
investment strategy been implemented.
Guam officials said if Guam had been allowed to sell arbitrage bonds and establish itself as an international finance
center, it would have become completely self-reliant and would
no longer have to depend on federal assistance.
Congressional proposal
to eliminate an important
tax benefit to Puerto Rico
Puerto Rico officials cited a 1982 congressional proposal
to eliminate an important tax benefit as an example of U.S.
insensitivity to Puerto Rican development needs.
The proposal
entailed a change to section 936 of the Internal Revenue Code,
which provides a federal tax exemption on profits earned by U.S.
firms operating in Puerto Rico.
Section 936 is an important
incentive
in
Puerto
Rico's
ability
to
attract
industry
and
capital to the island. The proposed change would have eliminated
the tax advantage, thereby adversely impacting Puerto Rico's
economy.
According to Puerto Rico officials, they were not consulted
about the proposed legislative change and had to lobby the White
House and Congress to obtain a compromise which protected the
tax benefit for firms operating in Puerto Rico.
They cited this.
example as a case where national tax policy was being formulated
without their input, which could have had adverse effects on
their economy.
Puerto Rico officials said the uncertainty
created by the proposed change hurt new investment in Puerto
Rico, as some firms cancelled or postponed investment actions.
29