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Change in Tax Laws or Federal Oversight Board Could Hurt Efforts to Grow R&D in Puerto Rico

By on March 4, 2016

Puerto Rico’s efforts to grow investments in research & development (R&D) could be irreparably damaged if the tax laws that finance the Science, Technology & Research Trust (Trust) are modified by Congress or a federal oversight board is established as part of efforts to restructure the island’s $70 billion debt to pay bondholders.

As the debate to deal with Puerto Rico’s debt crisis focuses on finding money to help pay bondholders, an area that could be affected is R&D, according to trust CEO Lucy Crespo.

For example, the federal fiscal board under discussion in Congress could have broad powers to make budget decisions regarding the Puerto Rico government, which might affect the Trust, she indicated.

During recent congressional hearings, one U.S. lawmaker asked about using the money from the Acts 20 & 22 incentives to help fund the earned-income tax credit for Puerto Rico. In essence, funds from Acts 20 & 22 could be diverted to provide this tax credit.

“It is important for people to understand that one of the reasons we are where we are is because we haven’t made the transformation to an innovation and knowledge-based economy,” Crespo said in an interview with Caribbean Business.

The country of Israel, for instance, yields over $2 billion in the area of R&D every year. In contrast, Puerto Rico’s R&D expenditures are sadly lacking. In 2013, estimated gross expenditures in Puerto Rico on R&D totaled $439.3 million, or 0.044% of gross domestic product, an increase of just 3.3% since 2009.

For every dollar of investment in innovation and R&D, five direct and indirect jobs are created, according to experts.

From 1963 to 2014, Puerto Rico obtained 1,045 patents, but the Trust is hoping to double the number in five years and obtain profits from the commercialization of inventions.

The Science, Technology & Research Trust is a nonprofit private entity that is using five different incentive laws to help attract and retain scientists and researchers, as it strives to turn the island into a world-class innovation center.

These incentives are Act 101 of 2008, which allows qualified researchers to seek tax exemptions for up to $195,000 for income generated from eligible research conducted at a local university or a $250,000 tax exemption if the research activity is conducted within Puerto Rico’s Science City.

Act 214 of 2004, the law that created the Trust, also receives funds from the law that imposes a 4% tax on foreign-controlled corporations.

Act 73 of 2008, the Economic Incentives Law, Act 20 of 2012, which grants incentives to companies that promote exports, and Act 22 of 2012, which helps attract millionaire investors, are also important tools promoting R&D.

Act 20, for instance, provides a 3% to 4% tax rate and partial exemptions on property and municipal taxes for R&D activities, and a 100% exemption on the distribution of company earnings and profits. Act 22 also provides tax exemptions to its beneficiaries.

How to broaden the knowledge-based economy?

The Trust is developing Science City, a state-of-the-art, mixed-use, transit-oriented, sciences, technology and research community, with supporting residential, retail and lodging uses on 68 acres of land in San Juan. Science City will be the equivalent of Silicon Valley, but with numerous tax incentives for its residents and businesses. It is located near important research facilities such as the Comprehensive Cancer Care Center, the new Molecular Sciences Research Center, the University of Puerto Rico Medical School and the University of Puerto Rico Río Piedras campus. Science City’s first laboratory, the Environmental Research Laboratory, is also in the works.

Crespo said that so far, the island has been able to attract some 34 top researchers with the help of local universities. For instance, Dr. Harold Saavedra, a cancer biologist from Emory University, and Dr. Devin Mueller, a neuroscientist from the University of Wisconsin-Milwaukee, both of whom were awarded prestigious RO1 research grants by the National Institutes of Health, are doing their work at the Ponce Research Institute. In turn, the Institute’s expansion was made possible by a $2 million grant from the Researchers Startup Funds Program, a Trust initiative to propel the island’s knowledge-based economy.

Crespo said the Trust’s Technology Transfer Office, which is the entity in charge of fostering the commercialization of locally developed scientific inventions and discoveries, is finally becoming fully operational after establishing liaisons with local universities.

The Trust also offers the scientific and high-tech entrepreneurship community its Small Business Innovation Research / Small Business Technology Transfer (SBIR / STTR) Matching Grant Program to incentivize local technology-oriented small-business firms and researchers to compete for SBIR / STTR grant awards and is providing technical help to those seeking to obtain grants.

At the same time, the Trust is expanding into the area of clinical trials. It recently made an alliance with Yale University Center for Clinical Research to do collaborative investigations and has established the Consortium for Clinical Investigation, headed by Dr. Kosmas Kretsos. In September, the trust is slated to hold its first Innovation Summit.

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