What This Bill Does
This bill changes tax rules for five U.S. possessions (Guam, American Samoa, Northern Mariana Islands, Puerto Rico and the Virgin Islands). The changes modify how the federal government determines who counts as a resident of these territories and what income is taxed based on where it comes from.
Who It Affects
People living in or moving to Guam, American Samoa, Northern Mariana Islands, Puerto Rico or the Virgin Islands. Businesses operating in these territories. The Internal Revenue Service (the federal tax agency).
Key Provisions
• People must have "substantial presence" in one of the five specified territories for at least 122 days during the tax year to count as a bona fide resident (someone who genuinely lives there for tax purposes). This is different from the current 31-day requirement that applies elsewhere. (Sec. 2(a))
• Income from activities within the United States that are preparatory or auxiliary in nature (basic support activities that help prepare for or assist the main business operation) will not be treated as U.S. income or as connected to a U.S. business. (Sec. 2(b))
• The bill changes how the government determines whether income from outside a territory is connected to doing business inside that territory, using different calculation principles than currently exist. (Sec. 2(b))
• Personal property sales income rules are amended to reference new tax code sections that relate to these territories. (Sec. 2(c))
What Changes
The residence threshold increases from 31 days to 122 days in a year for someone to qualify as a territorial resident. Certain types of U.S. income will no longer count toward tax obligations in these territories. The method for calculating whether outside income is tied to territorial business activity will change.
Important Definitions
"Bona fide resident" means someone who has a genuine residence in one of the five specified territories. "Substantially present" means spending at least 122 days in the territory during the tax year. "Effectively connected income" means money earned that is linked to running a business in a specific location.
Effective Date
The changes apply to tax years beginning after December 31, 2022. (Sec. 2(d))
I
118TH CONGRESS
1ST SESSION H. R. 1034
To amend the Internal Revenue Code of 1986 to modify the residence and
source rules to provide for economic recovery in the possessions of the
United States.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 14, 2023
Ms. PLASKETT introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to modify
the residence and source rules to provide for economic
recovery in the possessions of the United States.
Be it enacted by the Senate and House of Representa-
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tives of the United States of America in Congress assembled,
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SECTION 1. SHORT TITLE.
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This Act may be cited as the ‘‘Territorial Tax Equity
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and Economic Growth Act of 2023’’.
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SEC. 2. MODIFICATION TO RESIDENCE AND SOURCE RULES
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INVOLVING POSSESSIONS.
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(a) BONA FIDE RESIDENT.—Section 937(a) of the
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Internal Revenue Code of 1986 is amended—
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•HR 1034 IH
(1) by striking the last sentence, and
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(2) by amending paragraph (1) to read as fol-
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lows:
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‘‘(1) who has a substantial presence (deter-
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mined under the principles of section 7701(b)(3)(A)
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(applied by substituting ‘122 days’ for ‘31 days’ in
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clause (i) thereof) without regard to sections
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7701(b)(3)(B), (C), and (D)) during the taxable
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year in Guam, American Samoa, the Northern Mar-
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iana Islands, Puerto Rico, or the Virgin Islands, as
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the case may be, and’’.
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(b) SOURCE RULES.—Section 937(b) of such Code
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is amended—
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(1) in paragraph (1), by striking ‘‘and’’ at the
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end,
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(2) in paragraph (2), by striking the period at
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the end and inserting ‘‘, but only to the extent such
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income is attributable to an office or fixed place of
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business within the United States (determined under
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the rules of section 864(c)(5)),’’, and
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(3) by adding at the end the following new
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paragraphs:
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‘‘(3) for purposes of paragraph (1), the prin-
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ciples of section 864(c)(2), rather than rules similar
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to the rules in section 864(c)(4), shall apply for pur-
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poses of determining whether income from sources
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without a possession specified in subsection (a)(1) is
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effectively connected with the conduct of a trade or
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business within such possession, and
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‘‘(4) for purposes of paragraph (2), income
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from activities within the United States which are of
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a preparatory or auxiliary character shall not be
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treated as income from sources within the United
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States or as effectively connected with the conduct
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of a trade or business within the United States.’’.
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(c) SOURCE
RULES
FOR
PERSONAL
PROPERTY
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SALES.—Section 865(j)(3) of such Code is amended by
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inserting ‘‘, 932,’’ after ‘‘931’’.
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(d) EFFECTIVE DATE.—The amendments made by
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this section shall apply to taxable years beginning after
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December 31, 2022.
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Æ
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