The Effect of Taxes on Investment and Income Shifting to Puerto Rico

Harry Grubert, Joel Slemrod

NBER Working Paper No. 4869
Issued in September 1994
NBER Program(s):   ITI   PE

The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the U.S. This lowers the tax penalty on real investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate. Because the ability to shift income is affected by the presence of real operations, the true marginal effective tax rate on investment in Puerto Rico depends on the income shifting opportunities.

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Published: Review of Economics and Statistics, Vol. 80, no. 3 (August 1998): 365-373.

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