Friday, December 15, 2017

Think Strategically: The Reason for Migration

By on November 28, 2017

Federal tax reform by Christmas

The federal tax reform pushed by the Republican majority has quickly advanced in both the House and Senate. On Monday, as Republican lawmakers returned from the Thanksgiving break, there was fierce determination to quickly pass it, with the customary horse-trading involved, senators engaged in ample discussion about concerns with facilitating their bill’s passage. With Republicans pressured to produce a significant legislative win, lawmakers are examining all kinds of changes.

On Tuesday, the Senate Budget Committee passed 12-11 the Republican tax plan and leaders are pushing for a floor vote this week. There appears to be little momentum for amendments that would offset some areas of the reform that affect the middle class. Specifically, the Congressional Budget Office has pointed that families earning less than $30,000 a year would be hurt with this reform while offering high-earners increased benefits.

We may see legislation by Christmas if Congress continues its current pace.

Puerto Rico’s manufacturers should propose an integrated economic development measure for all U.S. territories.

As federal tax reform continues its process in the Senate, Puerto Rico’s prospect of prevailing to protect our strong manufacturing base is a do-or-die situation.

We have seen the private sector and most political leaders align with the governor in seeking special provisions that would create the basis for new economic development under tax reform.

One of the ideas that must be included is establishing a new section 245 for treating dividends received from foreign corporations. It is widely documented that multinational companies in the United States have accumulated more than $2.5 trillion outside the United States to avoid paying avoid paying corporate tax on those profits.

According to recent studies, it is estimated these companies have avoided paying more than $700 billion in taxes. We may request to the Congress the implementation of a “Law of Economic Development for the American Territories.”

This law can create the basis for an integrated economic development strategy. When choosing to establish operations in a U.S. territory corporations would be granted an additional benefit when repatriating their income through the Internal Revenue Service if the company decides to develop operations and employ 100 or more people in any of the U.S. territories.

The Burgundy Cross flies alongside the U.S. and Puerto Rican flags of Spain at Castillo San Felipe del Morro in San Juan.

 

By creating this law, the territories could become the entry point for foreign profits of U.S. corporations and would create hundreds of thousands of American jobs in Guam, the Northern Mariana Islands, American Samoa, the U.S. Virgin Islands and Puerto Rico without affecting the income of federal internal revenues. From my point of view, it is a proposal that can bring together all the territories; it is fair and can unite the entire country in promoting it in Congress.

With one of the areas excluded from the House version of the bill is a consideration for the current tax incentives that are in place for controlled foreign corporations. Puerto Rico may benefit in seeking this idea of an integrated economic development vehicle for all U.S. territories. Puerto Rico’s economy depends heavily on its manufacturing base as it currently represents 47.3% of gross domestic product (GDP). If Congress passes tax reform without any measure to protect U.S. territories, the consequences for Puerto Rico will be severe.

Manufacturing’s share of GDP

This scenario along with Puerto Rico’s $94 billion aid request creates a significant opportunity. More to come.

Puerto Rico housing market tanks in 2017

We recently reviewed the Global Property Guide to review trends in the real estate market. Some of the findings were unexpected. The global housing boom appears to be slowing down. With part of Latin America, the Middle East, New Zealand and parts of Asia showing falling prices. To properly review the landscape, we compiled the worst markets, which showed the largest year-over-year drop in prices. The numbers are as of the second quarter (2Q) of 2017 and are inflation-adjusted prices.

The bottom seven markets include Singapore, Ukraine, Egypt, Macedonia, Qatar, Russia and Puerto Rico.

Country Rank 2Q2017 2Q2016 Change
Singapore 7 (2.64) (2.91) (0.27)
Ukraine 6 (3.33) (1.93) (1.40)
Egypt 5 (5.32) (11.20) (5.88)
Macedonia 4 (3.91) (0.36) (3.55)
Qatar 3 (5.47) 4.66 (10.13)
Russia 2 (3.71) (6.03) (2.32)
Puerto Rico 1 (7.88) 3.43 (11.31)

According to this report, Puerto Rico has the weakest housing market in the global house price survey, as well as its continuing  economic challenges, very high unemployment, massive outmigration and a debt crisis that brought on Promesa.

Home prices in Puerto Rico fell 9.59% year-over-year in 2Q 2017, after climbing by 3.26% in 2016.

We must note that the Global Property Guide’s analysis was prepared before the destruction wrought by Hurricane María, which hit at the end of the third quarter. We should expect this scenario to worsen.

On the flip side, the five healthiest markets in the survey were: Iceland (+21.28%), Hong Kong (+19.27%), Ireland (+13.52%), Canada (+13.08%) and Romania (+8.87%).

Puerto Rico Update: FEMA granted power to pre-approve use of hurricane aid

In Rosselló’s announcement of his agreement to allow FEMA to pre-approve the use of any federal funds, he mentioned that the agency had never taken such a step before.

“We want to embark on the most transparent, effective and efficient recovery process in the history of our nation,” the governor stated in the press conference. “We want to create a certain set of controls that have been unprecedented, robust in nature and that work in collaboration with all of the federal agencies.”

With more than $100 billion in damages to Puerto Rico, we need all the help we can get from Washington, so we see this recent move from the governor as a positive sign of transparency.

Final word: Satisfaction by reinvention: Chef María Santana

Sixty-eight days and counting without power

With 68 days past since Hurricane María devastated Puerto Rico, the island continues in crisis mode. Our supply chain continues to suffer as most retail outlets have not been able to resupply their businesses to pre-Irma and María levels, according to Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym), most businesses haven’t had their electricity service restored and those that can are operating with generators.

Large, prominent districts such as the De Diego Avenue area, Miramar, Carolina, Río Piedras and Guaynabo have hundreds of closed businesses.

The most recent available information estimates 5,000 companies will go out of business due to the infrastructure collapse caused by the storm.

As daunting as this scenario is, there are stories of small business owners who refuse to go down without a fight. There is no higher satisfaction of the soul than fighting for what you believe in, what you love and for your cause. In the aftermath of Hurricane María, each Puerto Rican has his own journey.

On Saturday, we saw friends we hadn’t seen in awhile who were catering an event. One of them, chef María Santana. María owns a small food truck, “El Serranso,” which sells tacos, quesadillas, burritos and other Mexican delicacies. María also works with other chefs to cater many large events.

While talking to María about how she fared after the hurricane, her face would both light up with excitement and express dismay as she told us her story of perseverance. You see, María’s food truck sustained significant damage. leaving her unable to work for a few days.

Not one to sit still, she borrowed all the equipment she could from other chefs and began selling her beef turnovers, known locally as “empanadillas,” and coffee door-to-door. She visited banks, gas station lines and the parking lots at major stores to feed hundreds of people looking for something hot to eat. Her empanadillas are legendary, and if you are so lucky that you get your hands on one of them, it will be a culinary experience you will not forget.

María then set up a table in the parking lot of a large retailer and also sold hotdogs. She would wake up at 4 a.m. to prepare and start selling her delicacies by 7 a.m., often coming back home every night with her trays empty and a significant amount of money. María chose to offer those in need of food a much-needed service at a reasonable price, for $2 you would get either an empanadilla or a hotdog and coffee.

Her work paid off as she was able to repair her food truck, her house and support her family during a time that looked bleak to anyone facing the daunting challenge of losing their principal source of income. María is an example to all the small and midsize entrepreneurs who choose to fight for their business everyday.

Nothing provides more satisfaction for the soul than listening to stories like María’s. She is just one of the hundreds of success stories occurring in Puerto Rico, We were so lucky to ask and learn how this small-framed woman with the heart of a lion not only survived but thrived. To her and her family, our love and gratitude.

If you want to know more about Chef María Santana and try her popular offerings, visit “El Serranso” near Auxilio Mutuo Hospital or call her at 787-697-7915.

We have been living for the past 68 days under circumstances that provide us with “The Reason for Migration.” However there is a group of Puerto Ricans that will not use this as the basis to head north. Anything worth having does not come easy, so don’t turn around, don’t give up; if you fall, get up fast and march on as you work to achieve your goals; push yourself hard to continue moving forward.

A tree that could not withstand Hurricane María’s winds was given new life by an artist. (Francisco Rodríguez-Castro photo)

–Francisco Rodríguez-Castro is president & CEO of Birling Capital Advisors LLC

 

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