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Puerto Rico fiscal board urged to engage in federal tax reform process

By on November 30, 2017

SAN JUAN – At a time when Congress is working quickly to approve a tax reform that seriously threatens Puerto Rico’s already battered economy, the island’s fiscal control board was urged to insert itself in the debate and demand changes.

Ahead of a revision of the commonwealth government’s fiscal plan, the board held its second “listening session” Thursday at the Automobile Accidents Compensation Administration (ACAA by its Spanish acronym) in Hato Rey. Most of the first panel’s participants agreed on the importance of achieving changes made in the federal tax reform to prevent the collapse of an economy that has been in recession for more than 11 years.

The board will hold its third and last listening session Monday in New York before it receives the government’s new fiscal plans Dec. 22. (Juan J. Rodríguez/CB)

The session was led by board Fiscal and Implementation Director Miguel Tulla. Also present were Executive Director Natalie Jaresko and board member David Skeel. Chairman José Carrión III; the government’s representative to the board, Christian Sobrino; and the director of the Fiscal Agency and Financial Advisory Authority, Gerardo Portela, only participated in the morning panels.

During his presentation, in a panel focused on the tax system, Ramón Cao, an economist and professor at the University of Puerto Rico (UPR), called on the board created by Promesa to bring to the attention of Congress and the White House the serious consequences the tax reform would have on the island’s industrial base if approved as currently considered, as it would reduce or eliminate the incentive for multinational companies to continue doing business in Puerto Rico, negatively affecting nearly a quarter of the Puerto Rico’s gross national product.

The Senate reportedly will approve its version of the tax plan by week’s end, while the House already approved its bill two weeks ago. It is expected that both chambers hash out their bills’ differences in conference committee, after which the Republican majority in Congress hopes to produce a final version in consensus that would obtain final approval.

The administration of Gov. Ricardo Rosselló Nevares and the island’s private sector are lobbying intensely for changes to be made to the tax plan that would affect foreign controlled corporations in Puerto Rico.

During the session, Prof. Cao said it was “optimistic” to think the commonwealth government could deliver a fiscal plan by Dec. 22 without being certain about how the federal tax reform will look like and how much in federal funds will arrive in Puerto Rico to recover from hurricanes Irma and María.

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The professor said it is crucial for the role of government, which should not stop being the “economic engine” of Puerto Rico, to be rethought, as well as to remember what the island’s insular economy entails, such as having high energy and transportation costs.

Regarding taxes, Cao suggested reducing rates, eliminating the collection of the sales and use tax (IVU by its Spanish acronym) between businesses and reducing the number of tax exemptions, among other ideas.

Contrary to the economist’s position of limiting and reevaluating tax credits the government grants to certain companies and sectors, Gabriel Hernández, a partner at accounting firm BDO Puerto Rico, believes that now, more than ever, Puerto Rico must bet on the incentives to stay competitive against other jurisdictions, whether foreign or in the United States.

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“If we eliminate the [tax] incentives, we take Puerto Rico out of the game,” the CPA said, while assuring the island needs to provide incentives if it wants to generate economic activity. He added that tax policy aimed at fostering economic growth is needed so that part of the government’s revenue is used to invest in areas that attract foreign investment.

Despite Hernández’s argument, and amid the debate that arose about the incentives, Cao reiterated that it was important to rethink the strategy, because the government has “the habit” of giving away tax credits, often without benefiting the local economy.

Another panelist who emphasized the relationship between a healthy economy and the state’s ability to collect taxes was Xenia Vélez, the Treasury secretary during the administration of former Gov. Pedro Rosselló. She now works at law firm McConnell Valdés, and for her, the problem lies in the state of the economy, because when there is money, residents pay taxes, she said.

As part of the solution,Vélez suggested “certainty and stability” in the economy, improvements to infrastructure, improving the business environment and the use of Treasury revenue only for “essential functions.” She also called for “common sense” in the implementation of economic and tax policies.

The former Treasury secretary also emphasized the need to implement a “robust system” of oversight, so taxpayers, in their cost-benefit analysis, understand it is better to comply with their tax responsibility, than to evade it. “The IRS is the gold standard,” she added.

Regarding specific tax measures the board could push, Isabel Hernández, of accounting and advisory firm Kevane Grant Thornton, presented suggestions such as giving a special deductions to companies depending on their number of employees, as well as a preferential rate for entities interested in undertaking a public-private partnership. She also proposed reducing tax rates at the individual level.

Regarding the IVU, Hernández proposed eliminating exempt products and services and moving toward different rates, depending on the product or the price. He also suggested eliminating the municipal tax businesses pay for their inventory and prioritizing property appraisal efforts.

The board will hold its third and last listening session Monday in New York before it receives the government’s new fiscal plans Dec. 22. It will also hold its 11th public meeting Tuesday in New York as well.

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