Friday, April 20, 2018

[COLUMN] Think Strategically: No One’s People—Colonial Subjects

By on December 18, 2017

Initial Public Offering Calendar—Trade Date Estimate: Week of 12/18/17
Company Ticker Deal Size Stock Exchange
Social Capital Hedosophia Holdings IPOA.U $500 million NYSE
Tremont Mortgage Trust Ticker: TRMT $  90 million Nasdaq

U.S. Tax Reform update: P.R. out of the money

Both the U.S. House and Senate announced that members of the conference committee had reached definitive agreements to nearly complete the Tax Bill.

The overhaul Republicans are attempting would create once-in-a-generation changes in how everyone is taxed—from small and midsize businesses to large multinational corporations—modifying for decades to come the established order on who pays more and who pays less.

Who benefits

  • People who work for a living, including the richest. The bill cuts individual tax rates and doubles the standard deduction to $12,000 for single people and about $24,000 for couples.
  • Wealthy Heirs. The estate tax threshold would get doubled to about $11 million for individuals and $22 million for married couples.
  • Businesses. The corporate rate would move to 21 percent from 35 percent, and shareholders and others with investment income would see their tax bills cut by one-third.
  • Big U.S. companies that operate globally would follow most other industrialized countries in switching to a “territorial” tax system, where overseas profits are not taxed at home.
  • Wall Street. Investment fund managers would not have to reclassify their “carried interest” compensation.
  • Individuals with large medical expenses.
  • College students and K-12 teachers.
  • Local governments, hospitals and housing. The legislation would preserve the tax-deductible status of private activity bonds.
  • Manufacturers. Significant manufacturers would benefit the most from a provision that would let businesses immediately write off the cost of new investments.

Who is affected

  • People in high-earning states such as New York and California will feel the loss of the federal deduction for all state and local taxes, and the new $750,000 cap on the home-mortgage interest deduction.
  • Corporate borrowers. Business debt would not receive the same tax benefits going forward.
  • Workers who depend on a regular paycheck. Many of them would get a mostly minimal decrease in the tax rate, compared to contractors and the self-employed.
  • Puerto Rico. Had sought full exemption from new taxes, since the island was being treated as a foreign jurisdiction when, in reality, it was a domestic one. This is in addition to the weak state of the local economy and right in the middle of the aftermath of two hurricanes. The tax bill treats affiliates of U.S. American companies in Puerto Rico as if they were operating in a foreign country, and imposes a 12.5 percent tax on intellectual property.

It seems evident that Congress does not care very much about the harm that this reform will cause Puerto Rico. Their lack of empathy mixed with disregard will deepen the divide for years to come. Moreover, it will create additional massive migration, which depending on the economic report you follow, the number leaving may be as high as 1.7 million Puerto Ricans by 2030.

With 5 million Puerto Ricans already in the States and the 1.7 million who may arrive, it becomes an army of 6.7 million voters who may swing most elections, which affects Congress.

Puerto Rico should have been better prepared from day one since most observers knew the Tax Reform was high on President Trumps’ list.

Final word: No One’s People—colonial subjects

In the book, “Conversaciones del Bohío: Luis Muñoz Marín & Antonio Fernós Isern in their own words,” then-Gov. Luis Muñoz Marín in 1952 said: “The lack of political dignity and sovereignty of Puerto Rico, coupled with the ignorance and lack of understanding of Congress and their unwillingness to grant Puerto Rico an adequate political autonomy, will not allow us to reach a full autonomy.”

It appears 65 years has not changed Congress’ view of Puerto Rico; moreover, it seems we have always been No One’s People.

While it is true in our recent past that some of our leaders’ lacked patriotism and solidarity, other leaders have placed aside their ideologies to benefit Puerto Rico—such as was the case in early 1985 when Section 936 was in grave danger. What transpired in Washington at that time would seem like an act of magic today.

In February of that year, then-Gov. Hernández Colón asked former Gov. Luis A. Ferré for assistance to help save 936. Ferré was “Mr. Republican,” a highly respected figure at the highest levels of the United States.

As adversaries, it must not have been easy for either governor to request that help, but neither of them thought twice about it.

Ferré arranged a meeting with Treasury Secretary James A. Baker to plead for Section 936. Secretary Baker received Ferré and Hernández Colón in his offices with excellent results.

This time around, we do not appear to have the same unity of purpose and wisdom. This has permitted Congress to do what they do best…Nothing.

We become No One’s People to Congress, since in their view we are not real “Americans”—we are simply Colonial Subjects.

We have to follow author Arthur Golden’s advice: “Adversity is like a strong wind. It tears away from us all but the things that cannot be torn, so that we see ourselves as we really are.”

Francisco Rodríguez-Castro, president & CEO of Birling Capital with over 25 years of experience, has been a key executive in government, global, multinational and public companies as well as a key corporate adviser to multiple entities in a diverse array of market segments. He has participated in structuring over $10 billion in municipal finance, corporate, commercial, asset-based, P.R. Industrial, Tourism, Educational, Medical & Environmental Control Facilities Financing Authority (Afica), and mergers & acquisitions transactions

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