Puerto Rico Manufacturers Assoc. warns US tax reform could be unconstitutional
SAN JUAN – Members of the Puerto Rico Manufacturers Association claims that the island could raise the argument that a congressionally proposed tax reform violates the interstate Commerce Clause were a tax on imports from Puerto Rico included in the final version and approved.
The comments were made by Carlos Serrano, president of the PRMA’s Government Affairs Committee, and Kenneth Rivera, member of the associations’ Tax Matters Committee, both of whom acknowledged it could be a complicated argument.
“It could be uphill but I think it affects commercial uniformity,” Rivera said. “It’s an alternative that I would give serious consideration.”
The House’s plan, the Tax Cuts & Jobs Act, which is expected to be voted on Thursday, contains a 20% tax on foreign imports. Although Puerto Rico is a U.S. territory, it is considered foreign for tax purposes, thus products made on the island would have to pay it. The measure also imposes a 10% tax on earnings outside the United States.
The Senate’s proposed reform is still being scrutinized by its tax-writing committee and does not contain the 20% import tax but contains other provisions to protect operations in the United States that affect Puerto Rico.
Attorney Jorge Velázquez agreed that the proposal to establish a 20% tax on Puerto Rico products is a substantial imposition that could be in violation of the Dormant Commerce Clause because it discriminates directly against goods from the island, favoring stateside-produced ones.
Velázquez, who runs the Mamotretos Don Miguel legal website, said the Puerto Rico Supreme Court has said the “dormant” or “negative” aspect of the Commerce Clause arises as a counterpart to the power that was expressly conferred on Congress and that protects the movement of goods between the states from obstacles they would want to impose.
Although both the local Supreme Court and the U.S. First Circuit Court of Appeals have ruled that the restrictions of the dormant clause apply directly to Puerto Rico, the U.S. Supreme Court has not expressed itself directly as to whether it applies to the island.
“We know that the two cases recently resolved on the status of Puerto Rico (such as) Sánchez Valle have emphasized the territorial subordination of Puerto Rico before Congress, and that the Dormant Clause has not been elevated to the rank of a fundamental right that would apply to Puerto Rico, by virtue of the doctrine of selective incorporation. Therefore, if this bill were approved, it would be a controversy that should be adjudicated at the federal Supreme Court, given the public interest and the ambiguity in the jurisprudence on this issue,” Velázquez said.
PRMA President Rodrigo Masses said that both the House and Senate tax plans seem to have been designed to affect multinationals in Puerto Rico. “We are demanding equality,” Masses said. “Both bills are catastrophic for Puerto Rico.”
Long before the tax reform proposals were revealed, the PRMA met with members of Congress in more than 300 meetings. However, language that would benefit Puerto Rico economically was not included, although in the past Congress passed the Promesa law precisely to straighten out the island’s finances. “It is incongruous to help Puerto Rico after [Hurricane] María and ruin it economically,” said Masses, who attributed the actions of Congress to election pressures.
Regarding what the plan would be were tax reform to be approved as is, Serrano said the two versions would have different repercussions. “Companies can always be restructured, but there would be erosion of what we have now,” he added.
The purpose of the proposed taxes is to force manufacturers to return stateside, but Masses recalled that when section 936 of the tax code was eliminated, or the credits that benefited firms in Puerto Rico, the companies did not return and established themselves in other countries.
“Our position is that it not be paid. It would be a drastic change to the 117-year customs practice,” Masses said. “After Hurricane María, being that the manufacturing sector is the only one that can lift Puerto Rico up, everything doesn’t directly focus on manufacturing we have to look at very carefully and focus it on everything that can help,” he added.