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No special treatment for Puerto Rico’s industrial base under US tax reform

By on December 15, 2017

SAN JUAN — The latest version of the proposed federal tax reform keeps foreign treatment of U.S. companies doing business in Puerto Rico, thus allowing for a 12.5% tax on these companies, Resident Commissioner Jenniffer González said Friday.

A committee comprising members of the House and Senate is expected to unveil Friday the most recent version of the bill, which could come down for a floor vote at both chambers as soon as early next week. The tax reform proposal could leave Puerto Rico without one of its main mechanisms to attract and maintain its manufacturing base, which accounts for more than 30% of the government’s revenue and over 100,000 jobs.

González told Caribbean Business she had anticipated that there was no support among Republicans in Congress to grant special treatment to U.S. companies operating as controlled foreign corporations (CFCs) in Puerto Rico.

“We must understand that the intention of this legislation is to attract all of this money to U.S. territory that has not been coming in by giving them a reduction in tax rates for their operations in the U.S. That’s why most companies support the legislation,” the resident commissioner explained.

Resident Commissioner Jenniffer González (Juan J. Rodríguez, File Photo/CB)

The proposal defended by Gov. Ricardo Rosselló Nevares, the leadership of the opposition Popular Democratic Party and the private sector was that Puerto Rico be exempt from the tax, “but the political reality here in Congress is different,” González said.

She was also pushing for the commonwealth to receive an increased child tax credit (CTC), a five-year extension to the increase in the reimbursement of the federal tax on imported rum from the island, and the reduction, retroactive to 2017, of the rate for domestic companies. None of those proposals were considered, according to El Nuevo Día.

Rodrigo Masses, president of the Puerto Rico Manufacturers Association, said in a Radio Isla interview that the congressional committee could have acted responsibly toward the island, but it didn’t. However, he added that the latest version of tax reform was the least burdensome of all the proposals that had been discussed to date.

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“To the majority of the parent companies of these corporations, this bill benefits them very much, in the mathematics of this formula, they may do well. It won’t necessarily go wrong for all of them,” Masses said. He explained that the 12.5% rate ​​would be based on a formula that must be applied “and it is possible that they come out quite well.”

He assured that a stampede of U.S. manufacturing companies leaving Puerto Rico is not expected, but additional mechanisms were not achieved to achieve a greater volume of industrial promotion to Puerto Rico. “This will cause a strategic change in the industrial promotion of the island,” he said.

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The former president of the island’s Senate and now the chamber’s minority leader, Eduardo Bhatia, had said earlier this week that U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah) had assured him Puerto Rico “would not be affected” by the final version of tax reform. On Friday, in a Radio Isla interview, Bhatia said the senator would have to explain why he deceived Puerto Rico.

For the past 31 years, the U.S. Congress has tried to amend the federal Internal Revenue Code to give greater benefits to U.S. corporations and attract their manufacturing operations to American soil. Now it seems the time has come to achieve it.

The initiative cannot come at a worse time for Puerto Rico, with a recession entering its 11th year and an infrastructure severely affected by Hurricane María. This is so because the latest version of tax reform provides for a significant increase in taxes paid by CFCs when they repatriate their earnings to their parent companies or for the use of intellectual property.

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