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Legislator warns of consequences were Puerto Rico a domestic jurisdiction

By on December 1, 2017

SAN JUAN – Puerto Rico Rep. Luis Vega Ramos, of the minority Popular Democratic Party (PDP), lambasted the legislative majority for supporting the proposal of Gov. Ricardo Rosselló’s administration to have Puerto Rico considered a domestic jurisdiction as part of the federal tax reform because it would involve having to pay federal taxes.

Vega Ramos said the commonwealth government’s efforts, which are backed by the Puerto Rico Manufacturers Association and other private sector organizations, aim to have Puerto Rico designated an incorporated territory and would result in residents having to pay federal taxes but not entitled to parity with the states with regard to federal funds.

Rep. Luis Vega Ramos speaks to the press during Sen. Bernie Sander’s visit to the island on Oct. 27, 2017. (Jaime Rivera/CB)

“That implies the repeal of section 9 of the Federal Relations Act. You get incorporated and all other taxes are applied: income taxes and corporate [taxes]. That would cost [Puerto Rico] $9 billion, according to the [2014] GAO [General Accountability Office] report. Saying that taxes should be applied to Puerto Rico is not the solution,” Vega Ramos said, referring to a report that analyzed the impact of statehood.

The legislator maintained that, were Puerto Rico to pay federal taxes as a domestic jurisdiction, the federal government would not have to provide federal funds at the same proportion it does to states because the island would be a territory and Congress could treat it differently.

The lawmaker’s remarks come about as Rosselló representatives and private sector organizations lobby Congress to include language in their tax plan that would consider Puerto Rico a domestic jurisdiction. For tax purposes, the island is currently considered a foreign jurisdiction, providing it with certain tax advantages that make it attractive for companies, mainly manufacturers, to establish operations, as well as residents not having to pay federal taxes.

The proposed reform discussed in Congress, which is pushed by the Trump administration to have a legislative win before year’s end and to help cement Republican dominance in Congress ahead of the 2018 elections, would impose higher taxes on products U.S. companies manufacture abroad and sold stateside.

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The House’s approved bill includes a 20% import tax, while the Senate’s, which may be voted on Friday, would impose a 12.5% tax on intellectual property used by the so-called controlled foreign corporations. Both bills would be consolidated in conference committee before being sent to Trump for enactment.

Until last week, the governor was advocating for the island to be excluded from those taxes and had not requested Puerto Rico be designated a domestic jurisdiction for tax purposes.

One of the tax reform’s main objectives is to lure U.S. manufacturers abroad with reduced corporate taxes. Rosselló posits that it would then benefit the island if it were a domestic jurisdiction.

Although Vega Ramos argues that the implications the change in designation could have for individuals are not being considered, he believes it would be as problematic that Puerto Rico continue being a foreign jurisdiction.

“That’s why I say that what we have to ask for is to be excluded from these provisions. What must be defended is the different treatment” the island gets, Vega Ramos told Caribbean Business. “Being a domestic jurisdiction is not the solution,” he reiterated.

He also argued that if Puerto Rico were domestic, it would be the same as a state for tax purposes, thus investors would not have an incentive to move their operations to the island.

“Coca-Cola would pay the same here as it pays in Atlanta, so it would have no reason to stay,” Vega Ramos stressed.

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