CPA Society urges Puerto Rico board to be cautious in reviewing fiscal plans
SAN JUAN – The Society of Certified Public Accountants of Puerto Rico warned the island’s Financial Oversight and Management Board to be careful when making economic predictions to modify the government’s fiscal plans since they will have a large margin of error due to the fragility of the economy.
In addition, the CPA Society indicated that with what is known so far about the impact of federal tax reform on foreign corporations, which represent 25% of the island’s gross domestic product, must be taken into consideration because it would alter economic incentive strategies. The oversight board is expected to review the fiscal plans by the end of the year.
According to the CPA Society, it will be very difficult to predict the short-, medium- and long-term effects of hurricane damage on the island’s already fragile economy while it still lacks electricity and telecommunications services as well as other complications such as a supply chain that is not yet functioning normally.
“We caution, for example, that estimates developed from prior experience with Hurricanes Georges and Hugo may be flawed because the magnitude of the damages now are much more significant, and the economy back then was on more solid footing prior to those storms. Until the electricity, telecommunications and other situations normalize, it will be difficult to determine how many businesses will re-open or how many of the people that have left the island will return,” the society said in its missive to the board.
CPA Society President Ramón Ponte said the CPA Foundation has ordered a study to analyze the impact of the storms on the economy that provides recommendations for the island’s economic recovery and sustainable development. In addition to the major challenges and uncertainties Puerto Rico faces are the potential impact of the U.S. tax code overhaul proposals under consideration in the U.S. Congress, which would significantly alter the Puerto Rico government’s economic incentive strategies.
In addition to the 20% tax on foreign corporations, under the Tax Cuts & Jobs Act, a parent company of one or more foreign subsidiaries would be subject to tax on 50% of the parent’s foreign “high returns,” or the excess of its average net income. The Senate’s tax reform bill contains similar provisions.
“When analyzed in context, the proposed reform heavily favors domestic U.S. manufacturing. Puerto Rico is a possession of the United States of America; however, in this reform the U.S. possessions are ignored,” Ponte said after emphasizing that U.S. subsidiaries in Puerto Rico will be left in an uncompetitive position.
The federal law Promesa establishes that any legislative act put into effect by the Government of Puerto Rico must be accompanied by a formal estimate–prepared by an appropriate government entity with experience in budgeting and finance, presumably the Office of Management and Budget–of the legislation’s impact on government spending and revenue.
“Hence, even though we are before an Act promoted by the U.S. Congress, the effects of H.R. 1 will have an unsurmountable effect on the Fiscal Plan previously submitted by the Government of Puerto Rico and approved by the FOMB. It is very relevant to note that the Puerto Rico manufacturing sector generates 21% of the Puerto Rico Government’s total income through the 4% tax applicable on the value of certain purchases made between related entities (i.e. Act 154- 2010) and nearly a third of general fund revenues when other taxes are considered,” Ponte said.
The CPA Society also urged the board to join the private sector and the government to lobby in Washington, D.C., for a tax reform that is fair to the island and does not treat it as a foreign jurisdiction.
“In addition to these recommendations aimed at protecting Puerto Rico and affording a competitive advantage over foreign jurisdictions, the FOMB should continue its efforts to implement the recommendations of the PROMESA Task Force and the provisions of Title V of PROMESA directed at spurring economic development and improving our infrastructure,” the organization’s letter reads.