Gov’t bets on Puerto Rico’s tax reclassification to attract insurers
During an Economic Development & Commerce Department (DDEC by its Spanish acronym) press conference, the agency’s Secretary Manuel Laboy Rivera and Insurance Commissioner Javier Rivera Ríos said the commonwealth government is betting on the approval of a bill introduced in the U.S. Congress by Puerto Rico’s resident commissioner, Jenniffer González Colón, to amend section 4301 of the Tax Cuts & Jobs Act of 2017, which would reclassify the island as part of the U.S. domestic market. The change would spearhead the development of the International Insurance Center (IIC) on the island.
According to the officials, the amendment could lead the island to become a world leader in the reinsurance industry as well as the possibility of generating about $10 billion for the economy in the form of premium deposits in local banks.
In addition, the classification change would allow Puerto Rico to compete with industry markets such as Bermuda and the Cayman Islands.
Laboy Rivera explained that the island’s greatest attraction for the industry is its stable regulatory framework as a U.S. jurisdiction, which protects and provides freedom to compete in the market.
“Evidently, because Puerto Rico is part of the United States, it also offers political stability and the matter of the currency, among other things, that make us attractive to that industry. Twenty percent of the economy in Puerto Rico is finance and insurance, so we have a very skilled workforce and knowledge of the regulations and everything that has to do with this sector, and without a doubt the incentives offered by Act 399 [International Insurers & Reinsurers Act] are extremely attractive and combined have turned this industry into one of great importance,” Laboy Rivera said.
“In Puerto Rico, we offer a tax exemption on net income in excess of $1.2 million; the preferential tax rate is 4 percent. There is a tax exemption on premiums and an exemption on dividends. This has led to the fact that since 2004 we have created 40 insurers and reinsurers organized under the IIC. Today, between insurers and reinsurers, we have 29 active entities in the center. Some of their countries of origin include the United States, Cayman Islands, Barbados, Bermuda, Germany and Argentina,” he added.
However, the insurance commissioner acknowledged it will not be known until December whether the bill was passed by Congress, but he assured the legislation addresses the issue more aggressively than in previous instances, thanks to the efforts between DDEC, Treasury and González Colón.
“We are very positive; we understand that at the moment it is about 60 percent versus 40 percent in our favor. There is no sense in being considered foreign. If the classification is eliminated, the federal sales tax these insurers have to pay today is eliminated, and we could capture at least 10 percent of the reinsurers’ market. This would give us a great opportunity to be able to participate one on one and be able to gain ground before the biggest competitors, and it would have an incredible impact on local banking,” Rivera Ríos said.
The combined assets of international insurers in the IIC is $145 million, according to the government. These, in turn, directly employ about 75 people for their daily operations, in addition to hundreds of indirect jobs at local firms that provide legal and accounting services, among others.
Laboy Rivera also praised Act 399, which was approved in 2004 and allows the government to promote Puerto Rico as an international insurance center. He assured the government has worked on maximizing how it interacts with Act 22-2012, known as the Individual Investors Act; Act 20-2012, the Export Services Act; and Act 273, the International Financial Center Regulatory Act, for the benefit of foreign investors.
“In the past 20 months, we have been quite aggressive outside the island. Many finance and insurance companies did not know about Puerto Rico, and with the passage of [Hurricane] Marla, they discovered us. Maria’s experience developed the opportunity to create new insurers and reinsurers, and with acts 20, 22 and 273, the full synergy is produced to serve the local market and export these services,” Laboy Rivera reiterated.
The secretary said it is the ideal time to develop this industry in Puerto Rico, despite acknowledging that 15 percent of the 1,600 people decreed under Act 22 left the island after Hurricane Maria. However, he said, most of them remain in Puerto Rico and others have already begun to arrive. Laboy Rivera added that by the end of this year, last year’s figure is expected to double.
The official also announced that on Oct. 22, he will participate in the 27th Insurance Congress of Central America, Panama & the Caribbean, where he will continue to promote Act 399 to industry members.