n-11-29.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Puerto Rican Excise Tax

Notice 2011-29

On October 25, 2010, Puerto Rico enacted legislation amending the Puerto Rico
Internal Revenue Code of 1994 (“PR IRC”). The legislation adds new rules (“Expanded
ECI Rules”) to section 1123 of the PR IRC that characterize certain income of
nonresident corporations, partnerships, and individuals (collectively, “nonresidents”) as
effectively connected with the conduct of a trade or business in Puerto Rico (“PR ECI”)
and therefore subject to Puerto Rican income tax. The legislation also adds new
section 2101 to the PR IRC to impose an excise tax (“Excise Tax”) on a controlled
group member’s acquisition from another group member of certain personal property
manufactured or produced in Puerto Rico and certain services performed in Puerto
Rico. Technical corrections to the legislation were enacted on October 28, 2010, and
January 31, 2011. Final regulations relating to the Expanded ECI Rules and the Excise
Tax were published on December 29, 2010. The Expanded ECI Rules and the Excise
Tax are generally effective for income accruing and acquisitions occurring, respectively,
after December 31, 2010.

Section 901 allows a credit against U.S. income tax for the amount of any

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income, war profits and excess profits tax (collectively, an “income tax”) paid or accrued
during the taxable year to any foreign country or to any possession of the United States.
A foreign levy is an income tax only if (a) it is a tax and (b) the predominant character of
that tax is that of an income tax in the U.S. sense. §1.901-2(a)(1) of the Income Tax
Regulations.
Under section 903, an income tax includes a tax paid or accrued in lieu of an
income tax that is otherwise generally imposed by any foreign country or by any
possession of the United States. Section 1.903-1(a) provides that a foreign levy is a tax
in lieu of an income tax only if it is a tax within the meaning of §1.901-2(a)(2) and it
meets the “substitution requirement” of §1.903-1(b). A foreign levy satisfies the
substitution requirement only if it operates in substitution for and not in addition to a
generally imposed income tax or series of income taxes and only to the extent that
liability for the foreign tax is not dependent (by its terms or otherwise) on the availability
of a credit for the foreign tax against income tax liability to another country. §1.903-
1(b)(1) and (2).
The IRS and the Treasury Department are evaluating the Excise Tax. The
provisions of the Excise Tax are novel. The determination of the creditability of the
Excise Tax requires the resolution of a number of legal and factual issues. Pending the
resolution of these issues, the IRS will not challenge a taxpayer’s position that the
Excise Tax is a tax in lieu of an income tax under section 903. This notice is effective
for Excise Tax paid or accrued on or after January 1, 2011. Any change in the foreign
tax credit treatment of the Excise Tax after resolution of the pending issues will be

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prospective, and will apply to Excise Tax paid or accrued after the date that further
guidance is issued.
Various personnel from the IRS and the Treasury Department participated in the
development of this notice. For further information regarding this notice,
contact Richard L. Chewning at (202) 622-3850 (not a toll-free call).