HR365-119

What This Bill Does

The Territorial Tax Parity Act amends Internal Revenue Code section 937(b)(2). It provides that income will be treated under the U.S.-source rule only to the extent the income is attributable to an office or fixed place of business within the United States, determined under section 864(c)(5). It also amends section 865(j)(3) to add a reference to section 932. The changes apply to taxable years beginning after December 31, 2024. The practical effect is to narrow when income connected to possession residents or businesses is characterized as U.S.-source, which can improve tax treatment for economic activity centered in Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands.

Who Benefits and How

Puerto Rico taxpayers benefit from a narrower rule for when income is treated as U.S.-source. Territorial businesses benefit if possession-centered income is less likely to be pulled into U.S.-source treatment. Tax advisers serving possession residents benefit from a clearer fixed-place-of-business standard. Territorial economic development agencies benefit from a tax-parity rule aimed at local business activity.

Who Bears the Burden and How

Treasury tax staff must issue guidance or administer the new section 937(b)(2) limitation. IRS examiners must determine whether income is attributable to a U.S. office or fixed place of business. Federal revenue may decline if less income is characterized as U.S.-source. Taxpayers claiming the rule must document office, fixed-place, and attribution facts.

Key Provisions

• Narrows the section 937(b)(2) source rule to income attributable to a U.S. office or fixed place of business.
• Adds section 932 to the section 865(j)(3) cross-reference.
• Applies the amendments to taxable years beginning after December 31, 2024.
• Protects possession-centered income from broader U.S.-source characterization.