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Proposed US tax reform ‘devastating’ for Puerto Rico

By on November 10, 2017

By Eva Lloréns Vélez and Yanira Hernández Cabiya

SAN JUAN – If the version of tax reform approved Thursday in the U.S. House Ways and Means Committee prevails at the end of the legislative debate, the already battered Puerto Rican economy will suffer a severe blow, experts interviewed by Caribbean Business said.

In a 24-16 vote, the lower chamber’s tax-writing committee approved a version of tax reform proposed by congressional Republicans that would establish a 20% tax on imported products that were manufactured outside the United States. For U.S. Internal Revenue Code purposes, Puerto Rico is a foreign jurisdiction.

The measure, which is expected to be approved next week by the full House, also proposes reducing the corporate tax rate from 35% to 20% and granting a preferential rate of up to 14% for multinationals to repatriate foreign earnings.

The Senate also presented Thursday a summary of its version of tax reform, which would also be detrimental to the island, as it proposes an overall minimum tax of 12.5% that would impact imports from Puerto Rico to the U.S. mainland.

The U.S. Capitol building in Washington, D.C. (AP file photo)

The president-elect of the Puerto Rico Chamber of Commerce, CPA Kenneth Rivera, explained that with these measures the U.S. government intends to prevent companies from leaving to other countries in search of lower taxes.

“That’s a challenge because in Puerto Rico industries pay 4% [for that repatriation of earnings] and they would then have to pay the difference [8%],” Rivera said.

Despite being a U.S. territory, Puerto Rico is not exempt from the import tax in either of the two versions of tax reform, known as the Tax Cuts and Jobs Act.

Rivera also indicated that the measure also imposes a tax on excess profits paid by corporations. For example, he said, if a firm has an average profit of $100 million for a particular year but makes more the following year, say $150 million, it would have to pay taxes on the difference.

The certified public accountant said the measure would also force U.S. companies operating abroad to repatriate their investments at special, reduced rates. That provision would also affect the island.

However, the proposal keeps excise taxes paid on sales in the United States of rum from Puerto Rico and the U.S. Virgin Islands, as well as the code’s Section 199 tax break until the end of 2017, both of which benefit the island. The latter provides a preferential tax rate for U.S. manufacturers equivalent to 9% of the taxable income that derives from certain manufacturing and production activities within the United States. This deduction reduces the federal tax rate most companies pay on that income, from 35% to a little less than 32%. It is estimated that the benefit of extending this provision for two years to companies in Puerto Rico would be $365 million.

Rivera, who believes tax reform will not be approved before Thanksgiving, as President Donald Trump would like, said the government of Puerto Rico has to do everything possible to prevent the measures from being approved.

Resident Commissioner Jenniffer González explained to Caribbean Business that both the provision to keep the rum excise tax and Section 199 were included at her request to position Puerto Rico in the original bill.

González said her dialog with House Ways and Means Chairman Kevin Brady (R-Texas) and Speaker Paul Ryan aimed at pushing for the final version to include the Earned Income Tax Credit, the Child Tax Credit and a differential for foreign corporations operating from Puerto Rico.

“What we have discussed, and they [the congressional leadership] understand, is that being in American territory they have to give us a differential,” he said.

The resident commissioner said the final version of the House is expected to be approved next week, while the Senate’s would be voted on after Thanksgiving break, both chambers having different versions of reform.

“The differences will be decided in conference to have a final measure approved before the Christmas break,” she said.

Senate potential

Former Puerto Rico Gov. Aníbal Acevedo Vilá, who also was resident commissioner in Washington, concurred in that if the measure were approved as approved by the House committee, “it would be devastating for Puerto Rico.”

Acevedo Vilá, who last week was with Gov. Ricardo Rosselló Nevares in the U.S. capital discussing potential proposals that could benefit the island, said there seems to be consensus that the measures in favor of Puerto Rico have a greater chance in the Senate.

“Everyone has told me that where we can fight and win is in the Senate. But if the Senate’s version doesn’t include special treatment for Puerto Rico, that would also be devastating,” the former official said.

Acevedo Vilá said he did not know if the proposal Rosselló Nevares presented to lawmakers is the same pushed by González because he was not present at the meetings to which the commissioner was invited.

González said she has not seen the proposal the governor is promoting in the Senate, but stressed that his proposal arises from the commitments made to the Private Sector Coalition with what was established in the government platform of the New Progressive Party.

Without going into the proposal promoted by the governor, Acevedo Vilá said it seemed to protect the island’s tax advantages.

The former governor accompanied Rosselló Nevares to a meeting with Sen. Roger Wicker (R-Mississippi), who pledged to advocate for the island, “but that does not mean he will vote against it if they do not include what Puerto Rico is asking for,” Acevedo Vilá clarified.

“The problem is the Senate is trying to approve the measure with rules that, in theory, do not need Democratic senators. If so, we need a Republican champion in the Senate to fight for Puerto Rico. It will be approved in the House without Democratic votes,” he added.

Acevedo Vilá emphasized that Rosselló Nevares met with Sen. Orrin Hatch (R-Utah), a member of the Finance Committee, but does not know if the senator is committed to include the amendments proposed by Puerto Rico.

He also stressed that the controversy that has emerged in recent days between the administration of Rosselló Nevares and the fiscal control board could affect the discussion of Puerto Rico tax issues.

He noted that the governor must decide if he will continue to fight against the fiscal board because the entity’s efforts to take more control over the island’s finances are at the request of congressional Republicans.

Concern in the industrial sector

Meanwhile, in written statements, the Private Sector Coalition joined the Puerto Rico Manufacturers Association in demanding that Puerto Rico be exempt from Section 4303 of the U.S. code, which imposes a 20% tax on products sold to the United States.

Coalition coordinator Francisco Montalvo stressed that the exemption is necessary to avoid what he called “the total collapse of the island’s economy.”

Puerto Rico Manufacturers Association concerned about GOP tax plan

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