Territorial Economic Recovery Act

Bill Number

H.R. 363

Origin Chamber

House

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-01-13: Referred to the House Committee on Ways and Means.

Last Updated

2025-02-14T18:46:02Z

AI-Generated Summary

Purpose

The Territorial Economic Recovery Act (H.R. 363) aims to support economic recovery in U.S. territories by reducing the U.S. tax burden on certain income earned by businesses operating there. It does this by excluding specific types of income from the "tested income" calculation under the Global Intangible Low-Taxed Income (GILTI) rules, which require U.S. shareholders of controlled foreign corporations (CFCs) to pay taxes on certain foreign earnings.

Key Provisions

• Exclusion from Tested Income: Amends Section 951A of the Internal Revenue Code to exclude income of a "qualified possession corporation" that is effectively connected to active business operations within a U.S. possession from the GILTI tested income calculation.
• Definition of U.S. Possession: Includes Puerto Rico, the U.S. Virgin Islands, and certain other territories (such as Guam, American Samoa, and the Northern Mariana Islands) as defined under existing tax law (Section 931(c)).
• Definition of Qualified Possession Corporation: A CFC qualifies if, over the prior three years (or its existence if shorter):
• At least 80% of its gross income comes from sources within a U.S. possession.
• At least 75% of its gross income is tied to active trade or business conducted within a U.S. possession.
• Effective Date: Applies to taxable years of foreign corporations beginning after December 31, 2023, and corresponding U.S. shareholders' taxable years.

Significant Changes to Existing Law

• Under current GILTI rules, U.S. shareholders must include a portion of a CFC's tested income in their U.S. taxable income, even if not distributed as dividends. This bill adds a new exclusion (subclause VI) specifically for qualifying income from U.S. possessions, which was not previously carved out.
• Introduces new subsections (g) and (h) to Section 951A with definitions for "possession of the United States" and "qualified possession corporation," providing clarity and targeted relief not available before.

Potential Impacts

• On Citizens and Businesses: U.S. shareholders of qualifying CFCs in territories may face lower U.S. tax liabilities, potentially freeing up capital for reinvestment in local economies. This could boost business activity and job creation in territories like Puerto Rico and the Virgin Islands, aiding recovery from economic challenges.
• On Government Agencies: The Internal Revenue Service (IRS) will need to update guidance, forms, and audits to verify eligibility for the exclusion, increasing administrative workload but possibly reducing enforcement on qualifying entities.
• On International Relations: Minimal direct impact, as it focuses on U.S. territories (which are domestic under U.S. law), but it may indirectly strengthen economic ties within U.S. insular areas without affecting foreign countries.

Main Stakeholders Affected

• Businesses in U.S. Territories: Corporations operating primarily in Puerto Rico, the Virgin Islands, Guam, American Samoa, or the Northern Mariana Islands that meet the income thresholds will benefit from reduced taxation.
• U.S. Shareholders: Individuals or entities owning at least 10% of qualifying CFCs, who will see lower GILTI inclusions and thus lower tax payments.
• U.S. Territories' Governments and Residents: Potential economic stimulus could improve local revenues and living standards, addressing disparities in these areas.
• Federal Government: Through reduced tax collections from GILTI but possible long-term gains from stronger territorial economies.

Notable Legal, Constitutional, or Political Implications

• Legal: Reinforces the tax code's treatment of U.S. possessions as distinct from foreign countries, building on existing provisions like Section 931 for bona fide residents. It may invite IRS rulemaking to define "active conduct of trade or business" more precisely, potentially leading to litigation over eligibility.
• Constitutional: Aligns with Congress's broad authority under the Territory Clause (Article IV, Section 3) to regulate U.S. territories differently from states, without raising equal protection concerns as it targets economic recovery in underserved areas.
• Political: Signals federal support for territorial economic development, possibly in response to events like natural disasters in Puerto Rico. It could spark debate on tax equity between states and territories but avoids broader international tax reforms.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Del. Plaskett, Stacey E. [D-VI]

Recent Actions

• 2025-01-13: Referred to the House Committee on Ways and Means.
• 2025-01-13: Introduced in House
• 2025-01-13: Introduced in House

Bill Versions

• Territorial Economic Recovery Act — issued 2025-01-13 — PDF (3 pages)