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Promesa Could Hold the Key to Economic Growth, Experts Say

By on August 3, 2016

SAN JUAN—Armed with a disposition in the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), in which Congress calls for the free flow of capital between the island and the mainland, the Private Sector Coalition will boost efforts to promote a U.S. tax policy that would promote investment in Puerto Rico.

The Promesa Act contains some pro-growth provisions that call for a so-called “infrastructure revitalization coordinator” to review projects, as well as an expedited permitting process for critical projects.

Juan Lara, Economist from Estudios Tecnicos-photo Ana Lluch 5-13-05 (2)

Economist Juan Lara estimates that the island would experience a 1.2% growth with Promesa’s tax proposal. (Photo: CB)

Section 701 of Promesa states that, “It is the sense of the Congress that any durable solution for Puerto Rico’s fiscal and economic crisis should include permanent, pro-growth fiscal reforms that feature, among other elements, a free flow of capital between possessions of the United States and the rest of the United States.”

Carlos Serrano, a certified public accountant with Reichard & Escalera, said during a Tuesday forum on Promesa organized by the Private Sector Coalition that the Puerto Rico Industrial Development Company, the Puerto Rico Manufacturers Association and the Coalition have been promoting a pro-growth proposal for at least two years.

He noted that the island’s manufacturing infrastructure has the potential of moving the economy forward and bring it up to the levels it had 10 years ago.

The pro-growth proposal, which consists of amendments to the U.S. Internal Revenue Code, would create a strong incentive for businesses to operate in Puerto Rico and ensure that such companies have an edge over other foreign jurisdictions.

At the same time, it has to be consistent with U.S. tax policy, Serrano said. He added that the proposal addresses Section 936 criticisms, specifically with the mandatory repatriation of trapped Puerto Rico source income, and strong base erosion rules to prevent people from moving income artificially to other jurisdictions.

“Revenues sometimes do not go back to the United States, and that is what we want to avoid,” he said.

A blueprint of the federal international tax reform, issued in June, suggests that Puerto Rico must eliminate its tax on repatriated funds and reduce income taxes locally.

The proposal that the coalition is promoting calls for dividends or repatriation payments from eligible Puerto Rico subsidiaries of U.S. companies to enjoy an 85% exemption. Subsidiaries would also enjoy a reduction in half of the full U.S. statutory tax rate for active Puerto Rico source income.

“Promesa gives us the opportunity to go in with this kind of proposal,” he noted.

Economist Juan Lara said that manufacturing firms consider that the proposal had serious potential.  He also quoted economist Warren Payne as saying that the proposal would cause a .6% growth in the island’s gross national product. Meanwhile, Lara estimates that the island would experience a 1.2% growth with the proposal.

“This would be a game changer for the island’s economy, because we have a scenario of continuous contraction. This incentive alone will create growth,” he said.

The proposal, according to Lara, could bring an additional $800 million in revenues to the island’s coffers. He said Payne estimated it could bring $600 million more.

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