SUPPLEMENT TO THE SPARTAN(registered trademark) MASSACHUSETTS MUNICIPAL
MONEY MARKET FUND
A FUND OF FIDELITY MASSACHUSETTS MUNICIPAL TRUST
MARCH 17, 1997 STATEMENT OF ADDITIONAL INFORMATION
The following information replaces the similar information found in
"Special Considerations Affecting Puerto Rico" beginning on page 8.
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO
The following highlights some of the more significant financial trends and
problems affecting the Commonwealth of Puerto Rico (the Commonwealth or
Puerto Rico), and is based on information drawn from official statements
and prospectuses relating to the securities offerings of Puerto Rico, its
agencies and instrumentalities, as available on the date of this SAI. FMR
has not independently verified any of the information contained in such
official statements, prospectuses, and other publicly available documents,
but is not aware of any fact which would render such information materially
inaccurate.
The economy of Puerto Rico is closely linked to that of the United States.
In fiscal 1995, trade with the United States accounted for approximately
89% of Puerto Rico's exports and approximately 65% of its imports. In this
regard, in fiscal 1995 Puerto Rico experienced a $4.6 billion positive
adjusted merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1995, aggregate
personal income was $27.0 billion ($26.2 billion in 1992 prices) and
personal per capita income was $7,296 ($7,074 in 1992 prices). Gross
domestic product in fiscal 1992 was $23.7 billion and gross product in
fiscal 1996 was $30.2 billion; ($26.7 billion in 1992 prices). This
represents an increase in gross product of 27.5% from fiscal 1992 to 1996
(12.7% in 1992 prices). For fiscal 1997, an increase in gross domestic
product of 2.7% over fiscal 1996 is forecasted. However, actual growth in
the Puerto Rico economy will depend on several factors including the
condition of the U.S. economy, the exchange value of the U.S. dollar, the
price stability of oil imports, any increase or decrease in the number of
visitors to the island, the level of exports, the level of federal
transfers, and the cost of borrowing.
Puerto Rico's economy continued to expand throughout the five-year period
from fiscal 1992 through fiscal 1996. Almost every sector of the economy
participated, and record levels of employment were achieved. Factors
behind the continued expansion included government-sponsored economic
development programs, periodic declines in the exchange value of the U.S.
dollar, the level of federal transfers, and the relatively low cost of
borrowing funds during the period.
Puerto Rico has made marked improvements in fighting unemployment.
Unemployment is at a low level compared to that of the late 1970s, but it
still remains significantly above the U.S. average and has been increasing
in recent years. Despite long-term improvements, the unemployment rate
rose from 16.5% to 16.8% from fiscal 1992 to fiscal 1993. However, by the
end of fiscal 1994, the unemployment rate dropped to 15.9% and as of the
end of fiscal 1996, stands at 13.8%. Despite this downturn, there is a
possibility that the unemployment rate will increase.
Manufacturing is the largest sector in the economy accounting for $17.7
billion or 41.8% of gross domestic product in fiscal 1995. Manufacturing
has experienced a basic change over the years as a result of the influx of
higher wage, high technology industries such as the pharmaceutical
industry, electronics, computers, microprocessors, scientific instruments
and high technology machinery. The service sector, which includes finance,
insurance, real estate, wholesale and retail trade, hotels and related
services and other services, ranks second in its contribution to gross
domestic product and is the sector that employs the greatest number of
people. In fiscal 1995, the service sector generated $15.9 billion in
gross domestic product or 37.5% of the total. Employment in this sector
grew from 449,000 in fiscal 1992 to 527,000 in fiscal 1996, a cumulative
increase of 17.6%, which increase was greater than the 11.8% cumulative
growths in employment over the same period, providing 46.7% of total
employment. The government sector of the Commonwealth plays an important
role in the economy of the island. In fiscal year 1995, the government
accounted for $4.5 billion or 10.6% of Puerto Rico's gross domestic product
and provided 21.7% of the total employment. Tourism also contributes
significantly to the island economy, accounting for $1.8 billion of gross
domestic product in fiscal 1995.
The present administration has developed and is implementing a new economic
development program which is based on the premise that the private sector
should provide the primary impetus for economic development and growth.
This new program, which is referred to as the New Economic Model, promotes
changing the role of the government from one of being a provider of most
basic services to that of a facilitator for private sector initiatives and
encourages private sector investment by reducing government-imposed
regulatory restraints.
The New Economic Model contemplates the development of initiatives that
will foster private investment in, and private management of, sectors that
are served more efficiently and effectively by the private enterprise. One
of these initiatives has been the adoption of a new tax code intended to
expand the tax base, reduce top personal and corporate tax rates, and
simplify the tax system.
The New Economic Model also seeks to identify and promote areas in which
Puerto Rico can compete more effectively in the global markets. Tourism
has been identified as one such area because of its potential for job
creation and contribution to the gross product. In 1993, a new Tourism
Incentives Act and a Tourism Development Fund were implemented in order to
provide special tax incentives and financing for the development of new
hotel projects and the tourism industry. As a result of these initiatives,
new hotels have been constructed or are under construction which have
increased the number of hotel rooms on the island from 8,415 in fiscal 1992
to 10,345 in fiscal 1996 and to 12,250 by the end of fiscal 1997.
The New Economic Model also seeks to reduce the size of the government's
direct contribution to gross domestic product. As part of this goal, the
government has transferred certain governmental operations and sold a
number of its assets to private parties. Among these are: (i) the sale of
the assets of the Puerto Rico Maritime Authority; (ii) the execution of a
five-year management agreement for the operation and management of the
Aqueducts and Sewer Authority by a private company; (iii) the execution by
the Aqueducts and Sewer Authority of a construction and operating agreement
with a private consortium for the design, construction, and operation of an
approximately 75 million gallon per day water pipeline to the San Juan
metropolitan area from the Dos Bocas reservoir in Utuado; and (iv) the
execution by the Electric Power Authority of power purchase contracts with
private power producers under which two cogeneration plants (with a total
capacity of 800 megawatts) will be constructed.
As part of the government's program to facilitate the provision of private
health services, in 1994 a new health insurance program was started in the
Fajardo region to provide qualifying Puerto Rico residents with
comprehensive health insurance coverage. In conjunction with this program
certain public health facilities are being privatized. The
administration's goal is to provide universal health insurance for such
qualifying residents. The total cost of this program will depend on the
number of municipalities included and the total number of participants. As
of June 30, 1996, over 760,000 persons were participating in the program at
an annual cost to the Commonwealth of approximately $296 million.
One of the factors assisting the development of the manufacturing sector in
Puerto Rico has been the federal and Commonwealth tax incentives available,
most notably section 936 of the Internal Revenue Code of 1986, as amended
("Section 936") and the Commonwealth's Industrial Incentives Program. The
Industrial Incentives Program, through the 1987 Industrial Incentives Act,
grants corporations engaged in certain qualified activities a fixed 90%
exemption from Commonwealth income and property taxes and a 60% exemption
from municipal license taxes during a 10, 15, 20, or 25 year period
depending on location.
For many years, U.S. companies operating in Puerto Rico enjoyed a special
tax credit that was available under Section 936 of the Code. Originally,
the credit provided an effective 100% federal tax exemption for operating
and qualifying investment income from Puerto Rico sources. Amendments to
Section 936 made in 1993 (the "1993 Amendments") instituted two alternative
methods for calculating the tax credit and limited the amount of the credit
that a qualifying company could claim. These limitations are based on a
percentage of qualifying income (the "percentage of income limitation") and
on qualifying expenditures on wages and other wage related benefits (the
"economic activity limitation" or "wage credit limitation"). As a result
of amendments incorporated in the Small Business Job Protection Act of 1996
enacted by the U.S. Congress and signed into law by President Clinton on
August 20, 1996 (the "1996 Amendments"), the tax credit is now being phased
out over a ten-year period for existing claimants and is no longer
available for corporations that establish operations in Puerto Rico after
October 13, 1995 (including existing Section 936 Corporations (as defined
below) to the extent substantially new operations are established in Puerto
Rico). The 1996 Amendments also moved the credit based on the economic
activity limitation to Section 30A of the Code and phased it out over 10
years. In addition, the 1996 Amendments eliminated the credit previously
available for income derived from certain qualified investments in Puerto
Rico. The Section 30A Credit and the remaining Section 936 credit are
discussed below.
SECTION 30A. The 1996 Amendments added a new Section 30A to the Code.
Section 30A permits a "qualifying domestic corporation" ("QDC") that meets
certain gross income tests (which are similar to the 80% and 75% gross
income tests of Section 936 of the Code discussed below) to claim a credit
(the "Section 30A Credit") against the federal income tax imposed on
taxable income derived from sources outside the United States from the
active conduct of a trade or business in Puerto Rico or from the sale of
substantially all the assets used in such business ("possession income").
A QDC is a U.S. corporation which (i) was actively conducting a trade or
business in Puerto Rico on October 13, 1995, (ii) had a Section 936
election in effect for its taxable year that included October 13, 1995,
(iii) does not have in effect an election to use the percentage limitation
of Section 936(a)(4)(B) of the Code, and (iv) does not add a "substantial
new line of business."
The Section 30A Credit is limited to the sum of (i) 60% of qualified
possession wages as defined in the Code, which includes wages up to 85% of
the maximum earnings subject to the OASDI portion of Social Security taxes
plus an allowance for fringe benefits of 15% of qualified possession wages,
(ii) a specified percentage of depreciation deductions ranging between 15%
and 65%, based on the class life of tangible property, and (iii) a portion
of Puerto Rico income taxes paid by the QDC, up to a 9% effective tax rate
(but only if the QDC does not elect the profit-split method for allocating
income from intangible property).
A QDC electing Section 30A of the Code may compute the amount of its active
business income, eligible for the Section 30A Credit, by using either the
cost sharing formula, the profit-split formula, or the cost-plus formula,
under the same rules and guidelines prescribed for such formulas as
provided under Section 936 (see discussion below). To be eligible for the
first two formulas, the QDC must have a significant presence in Puerto
Rico.
In the case of taxable years beginning after December 31, 2001, the amount
of possession income that would qualify for the Section 30A Credit would be
subject to a cap based on the QDC's possession income for an average
adjusted base period ending before October 14, 1995.
Section 30A applies only to taxable years beginning after December 31, 1995
and before January 1, 2006.
SECTION 936. Under Section 936 of the Code, as amended by the 1996
Amendments, and as an alternative to the Section 30A Credit, U.S.
corporations that meet certain requirements and elect its application
("Section 936 Corporations") are entitled to credit against their U.S.
corporate income tax, the portion of such tax attributable to income
derived from the active conduct of a trade or business within Puerto Rico
("active business income") and from the sale or exchange of substantially
all assets used in the active conduct of such trade or business. To
qualify under Section 936 in any given taxable year, a corporation must
derive for the three-year period immediately preceding the end of such
taxable year, (i) 80% or more of its gross income from sources within
Puerto Rico, and (ii) 75% or more of its gross income from the active
conduct of a trade or business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect to compute its
active business income, eligible for the Section 936 credit, under one of
three formulas: (A) a cost-sharing formula, whereby it is allowed to claim
all profits attributable to manufacturing intangibles, and other functions
carried out in Puerto Rico, provided it contributes to the research and
development expenses of its affiliated group or pays certain royalties; (B)
a profit-split formula, whereby it is allowed to claim 50% of the net
income of its affiliated group from the sale of products manufactured in
Puerto Rico; or (C) a cost-plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in Puerto Rico. To
be eligible for the first two formulas, the Section 936 Corporation must
have a significant business presence in Puerto Rico for purposes of the
Section 936 rules.
As a result of the 1993 Amendments and the 1996 Amendments, the Section 936
credit is only available to companies that elect the percentage of income
limitation and is limited in amount to 40% of the credit allowable prior to
the 1993 Amendments, subject to a five-year phase-in period from 1994 to
1998 during which period the percentage of the allowable credit is reduced
from 60% to 40%.
In the case of taxable years beginning on or after 1998, the possession
income subject to the Section 936 credit will be subject to a cap based on
the Section 936 Corporation's possession income for an average adjusted
base period ending on October 14, 1995. The Section 936 credit is
eliminated for taxable years beginning in 2006.
OUTLOOK. It is not possible at this time to determine the long-term effect
on the Puerto Rico economy of the enactment of the 1996 Amendments to
Section 936. The Government of Puerto Rico does not believe there will be
short-term or medium-term material adverse effects on Puerto Rico's economy
as a result of the enactment of the 1996 Amendments. The Government of
Puerto Rico further believes that during the phase-out period sufficient
time exists to implement additional incentive programs to safeguard Puerto
Rico's competitive position. Additionally, the Governor intends to propose
a new federal incentive program similar to what is now provided under
Section 30A. Such program would provide U.S. companies a tax credit based
on qualifying wages paid, other wage related expenses such as fringe
benefits, depreciation expenses for certain tangible assets, and research
and development expenses, and would restore the credit granted to passive
income under Section 936 prior to its repeal by the 1996 Amendments. Under
the Governor's proposal, the credit granted to qualifying companies would
continue in effect until Puerto Rico shows, among other things, substantial
economic improvements in terms of certain economic parameters.
SUPPLEMENT TO FIDELITY MASSACHUSETTS MUNICIPAL MONEY MARKET FUND
FIDELITY MASSACHUSETTS MUNICIPAL INCOME FUND
FUNDS OF FIDELITY MASSACHUSETTS MUNICIPAL TRUST
MARCH 17, 1997 STATEMENT OF ADDITIONAL INFORMATION
The following information replaces the similar information found in
"Special Considerations Affecting Puerto Rico" beginning on page 12.
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO
The following highlights some of the more significant financial trends and
problems affecting the Commonwealth of Puerto Rico (the Commonwealth or
Puerto Rico), and is based on information drawn from official statements
and prospectuses relating to the securities offerings of Puerto Rico, its
agencies and instrumentalities, as available on the date of this SAI. FMR
has not independently verified any of the information contained in such
official statements, prospectuses, and other publicly available documents,
but is not aware of any fact which would render such information materially
inaccurate.
The economy of Puerto Rico is closely linked to that of the United States.
In fiscal 1995, trade with the United States accounted for approximately
89% of Puerto Rico's exports and approximately 65% of its imports. In this
regard, in fiscal 1995 Puerto Rico experienced a $4.6 billion positive
adjusted merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1995, aggregate
personal income was $27.0 billion ($26.2 billion in 1992 prices) and
personal per capita income was $7,296 ($7,074 in 1992 prices). Gross
domestic product in fiscal 1992 was $23.7 billion and gross product in
fiscal 1996 was $30.2 billion; ($26.7 billion in 1992 prices). This
represents an increase in gross product of 27.5% from fiscal 1992 to 1996
(12.7% in 1992 prices). For fiscal 1997, an increase in gross domestic
product of 2.7% over fiscal 1996 is forecasted. However, actual growth in
the Puerto Rico economy will depend on several factors including the
condition of the U.S. economy, the exchange value of the U.S. dollar, the
price stability of oil imports, any increase or decrease in the number of
visitors to the island, the level of exports, the level of federal
transfers, and the cost of borrowing.
Puerto Rico's economy continued to expand throughout the five-year period
from fiscal 1992 through fiscal 1996. Almost every sector of the economy
participated, and record levels of employment were achieved. Factors
behind the continued expansion included government-sponsored economic
development programs, periodic declines in the exchange value of the U.S.
dollar, the level of federal transfers, and the relatively low cost of
borrowing funds during the period.
Puerto Rico has made marked improvements in fighting unemployment.
Unemployment is at a low level compared to that of the late 1970s, but it
still remains significantly above the U.S. average and has been increasing
in recent years. Despite long-term improvements, the unemployment rate
rose from 16.5% to 16.8% from fiscal 1992 to fiscal 1993. However, by the
end of fiscal 1994, the unemployment rate dropped to 15.9% and as of the
end of fiscal 1996, stands at 13.8%. Despite this downturn, there is a
possibility that the unemployment rate will increase.
Manufacturing is the largest sector in the economy accounting for $17.7
billion or 41.8% of gross domestic product in fiscal 1995. Manufacturing
has experienced a basic change over the years as a result of the influx of
higher wage, high technology industries such as the pharmaceutical
industry, electronics, computers, microprocessors, scientific instruments
and high technology machinery. The service sector, which includes finance,
insurance, real estate, wholesale and retail trade, hotels and related
services and other services, ranks second in its contribution to gross
domestic product and is the sector that employs the greatest number of
people. In fiscal 1995, the service sector generated $15.9 billion in
gross domestic product or 37.5% of the total. Employment in this sector
grew from 449,000 in fiscal 1992 to 527,000 in fiscal 1996, a cumulative
increase of 17.6%, which increase was greater than the 11.8% cumulative
growths in employment over the same period, providing 46.7% of total
employment. The government sector of the Commonwealth plays an important
role in the economy of the island. In fiscal year 1995, the government
accounted for $4.5 billion or 10.6% of Puerto Rico's gross domestic product
and provided 21.7% of the total employment. Tourism also contributes
significantly to the island economy, accounting for $1.8 billion of gross
domestic product in fiscal 1995.
The present administration has developed and is implementing a new economic
development program which is based on the premise that the private sector
should provide the primary impetus for economic development and growth.
This new program, which is referred to as the New Economic Model, promotes
changing the role of the government from one of being a provider of most
basic services to that of a facilitator for private sector initiatives and
encourages private sector investment by reducing government-imposed
regulatory restraints.
The New Economic Model contemplates the development of initiatives that
will foster private investment in, and private management of, sectors that
are served more efficiently and effectively by the private enterprise. One
of these initiatives has been the adoption of a new tax code intended to
expand the tax base, reduce top personal and corporate tax rates, and
simplify the tax system.
The New Economic Model also seeks to identify and promote areas in which
Puerto Rico can compete more effectively in the global markets. Tourism
has been identified as one such area because of its potential for job
creation and contribution to the gross product. In 1993, a new Tourism
Incentives Act and a Tourism Development Fund were implemented in order to
provide special tax incentives and financing for the development of new
hotel projects and the tourism industry. As a result of these initiatives,
new hotels have been constructed or are under construction which have
increased the number of hotel rooms on the island from 8,415 in fiscal 1992
to 10,345 in fiscal 1996 and to 12,250 by the end of fiscal 1997.
The New Economic Model also seeks to reduce the size of the government's
direct contribution to gross domestic product. As part of this goal, the
government has transferred certain governmental operations and sold a
number of its assets to private parties. Among these are: (i) the sale of
the assets of the Puerto Rico Maritime Authority; (ii) the execution of a
five-year management agreement for the operation and management of the
Aqueducts and Sewer Authority by a private company; (iii) the execution by
the Aqueducts and Sewer Authority of a construction and operating agreement
with a private consortium for the design, construction, and operation of an
approximately 75 million gallon per day water pipeline to the San Juan
metropolitan area from the Dos Bocas reservoir in Utuado; and (iv) the
execution by the Electric Power Authority of power purchase contracts with
private power producers under which two cogeneration plants (with a total
capacity of 800 megawatts) will be constructed.
As part of the government's program to facilitate the provision of private
health services, in 1994 a new health insurance program was started in the
Fajardo region to provide qualifying Puerto Rico residents with
comprehensive health insurance coverage. In conjunction with this program
certain public health facilities are being privatized. The
administration's goal is to provide universal health insurance for such
qualifying residents. The total cost of this program will depend on the
number of municipalities included and the total number of participants. As
of June 30, 1996, over 760,000 persons were participating in the program at
an annual cost to the Commonwealth of approximately $296 million.
One of the factors assisting the development of the manufacturing sector in
Puerto Rico has been the federal and Commonwealth tax incentives available,
most notably section 936 of the Internal Revenue Code of 1986, as amended
("Section 936") and the Commonwealth's Industrial Incentives Program. The
Industrial Incentives Program, through the 1987 Industrial Incentives Act,
grants corporations engaged in certain qualified activities a fixed 90%
exemption from Commonwealth income and property taxes and a 60% exemption
from municipal license taxes during a 10, 15, 20, or 25 year period
depending on location.
For many years, U.S. companies operating in Puerto Rico enjoyed a special
tax credit that was available under Section 936 of the Code. Originally,
the credit provided an effective 100% federal tax exemption for operating
and qualifying investment income from Puerto Rico sources. Amendments to
Section 936 made in 1993 (the "1993 Amendments") instituted two alternative
methods for calculating the tax credit and limited the amount of the credit
that a qualifying company could claim. These limitations are based on a
percentage of qualifying income (the "percentage of income limitation") and
on qualifying expenditures on wages and other wage related benefits (the
"economic activity limitation" or "wage credit limitation"). As a result
of amendments incorporated in the Small Business Job Protection Act of 1996
enacted by the U.S. Congress and signed into law by President Clinton on
August 20, 1996 (the "1996 Amendments"), the tax credit is now being phased
out over a ten-year period for existing claimants and is no longer
available for corporations that establish operations in Puerto Rico after
October 13, 1995 (including existing Section 936 Corporations (as defined
below) to the extent substantially new operations are established in Puerto
Rico). The 1996 Amendments also moved the credit based on the economic
activity limitation to Section 30A of the Code and phased it out over 10
years. In addition, the 1996 Amendments eliminated the credit previously
available for income derived from certain qualified investments in Puerto
Rico. The Section 30A Credit and the remaining Section 936 credit are
discussed below.
SECTION 30A. The 1996 Amendments added a new Section 30A to the Code.
Section 30A permits a "qualifying domestic corporation" ("QDC") that meets
certain gross income tests (which are similar to the 80% and 75% gross
income tests of Section 936 of the Code discussed below) to claim a credit
(the "Section 30A Credit") against the federal income tax imposed on
taxable income derived from sources outside the United States from the
active conduct of a trade or business in Puerto Rico or from the sale of
substantially all the assets used in such business ("possession income").
A QDC is a U.S. corporation which (i) was actively conducting a trade or
business in Puerto Rico on October 13, 1995, (ii) had a Section 936
election in effect for its taxable year that included October 13, 1995,
(iii) does not have in effect an election to use the percentage limitation
of Section 936(a)(4)(B) of the Code, and (iv) does not add a "substantial
new line of business."
The Section 30A Credit is limited to the sum of (i) 60% of qualified
possession wages as defined in the Code, which includes wages up to 85% of
the maximum earnings subject to the OASDI portion of Social Security taxes
plus an allowance for fringe benefits of 15% of qualified possession wages,
(ii) a specified percentage of depreciation deductions ranging between 15%
and 65%, based on the class life of tangible property, and (iii) a portion
of Puerto Rico income taxes paid by the QDC, up to a 9% effective tax rate
(but only if the QDC does not elect the profit-split method for allocating
income from intangible property).
A QDC electing Section 30A of the Code may compute the amount of its active
business income, eligible for the Section 30A Credit, by using either the
cost sharing formula, the profit-split formula, or the cost-plus formula,
under the same rules and guidelines prescribed for such formulas as
provided under Section 936 (see discussion below). To be eligible for the
first two formulas, the QDC must have a significant presence in Puerto
Rico.
In the case of taxable years beginning after December 31, 2001, the amount
of possession income that would qualify for the Section 30A Credit would be
subject to a cap based on the QDC's possession income for an average
adjusted base period ending before October 14, 1995.
Section 30A applies only to taxable years beginning after December 31, 1995
and before January 1, 2006.
SECTION 936. Under Section 936 of the Code, as amended by the 1996
Amendments, and as an alternative to the Section 30A Credit, U.S.
corporations that meet certain requirements and elect its application
("Section 936 Corporations") are entitled to credit against their U.S.
corporate income tax, the portion of such tax attributable to income
derived from the active conduct of a trade or business within Puerto Rico
("active business income") and from the sale or exchange of substantially
all assets used in the active conduct of such trade or business. To
qualify under Section 936 in any given taxable year, a corporation must
derive for the three-year period immediately preceding the end of such
taxable year, (i) 80% or more of its gross income from sources within
Puerto Rico, and (ii) 75% or more of its gross income from the active
conduct of a trade or business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect to compute its
active business income, eligible for the Section 936 credit, under one of
three formulas: (A) a cost-sharing formula, whereby it is allowed to claim
all profits attributable to manufacturing intangibles, and other functions
carried out in Puerto Rico, provided it contributes to the research and
development expenses of its affiliated group or pays certain royalties; (B)
a profit-split formula, whereby it is allowed to claim 50% of the net
income of its affiliated group from the sale of products manufactured in
Puerto Rico; or (C) a cost-plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in Puerto Rico. To
be eligible for the first two formulas, the Section 936 Corporation must
have a significant business presence in Puerto Rico for purposes of the
Section 936 rules.
As a result of the 1993 Amendments and the 1996 Amendments, the Section 936
credit is only available to companies that elect the percentage of income
limitation and is limited in amount to 40% of the credit allowable prior to
the 1993 Amendments, subject to a five-year phase-in period from 1994 to
1998 during which period the percentage of the allowable credit is reduced
from 60% to 40%.
In the case of taxable years beginning on or after 1998, the possession
income subject to the Section 936 credit will be subject to a cap based on
the Section 936 Corporation's possession income for an average adjusted
base period ending on October 14, 1995. The Section 936 credit is
eliminated for taxable years beginning in 2006.
OUTLOOK. It is not possible at this time to determine the long-term effect
on the Puerto Rico economy of the enactment of the 1996 Amendments to
Section 936. The Government of Puerto Rico does not believe there will be
short-term or medium-term material adverse effects on Puerto Rico's economy
as a result of the enactment of the 1996 Amendments. The Government of
Puerto Rico further believes that during the phase-out period sufficient
time exists to implement additional incentive programs to safeguard Puerto
Rico's competitive position. Additionally, the Governor intends to propose
a new federal incentive program similar to what is now provided under
Section 30A. Such program would provide U.S. companies a tax credit based
on qualifying wages paid, other wage related expenses such as fringe
benefits, depreciation expenses for certain tangible assets, and research
and development expenses, and would restore the credit granted to passive
income under Section 936 prior to its repeal by the 1996 Amendments. Under
the Governor's proposal, the credit granted to qualifying companies would
continue in effect until Puerto Rico shows, among other things, substantial
economic improvements in terms of certain economic parameters.
