In October 2009, Puerto Rico enacted a new PR excise tax on certain personal property produced in PR and services performed in PR. The tax is effective for transactions occurring after December 31, 2010.
IRC Code Section 901 allows a credit against US federal income tax for any income tax paid or accrued during the tax year to a foreign country or US possession. Foreign tax is creditable only if it has a character of income tax in US sense. PR excise tax is clearly not the income tax. However, under Code Section 903, a tax paid in lieu of income tax qualifies for a credit in US if the foreign tax is imposed in substitution and not in addition to a generally imposed income tax.
PR excise tax has some novel features and IRS needs time to evaluate. Until IRS resolves the issue of creditability of PR taxes, IRS announced in Notice 2011-29 that it will not challenge a position that the PR tax is a creditable foreign tax under Code Section 903.
It is pertinent to note here that IRS is still evaluating creditability of Mexican “Flat Tax” which was imposed in January 2008, however, such tax remains creditable at this time under the similar grounds.