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Puerto Rico gov’t, private sector unite to lobby Congress on tax reform

By on November 28, 2017

SAN JUAN – Puerto Rico business and industry leaders closed ranks Monday with the administration of Gov. Ricardo Rosselló in asking that Puerto Rico be declared a domestic jurisdiction in the federal tax reform legislation under discussion in Congress.

The decision, which Manufacturers Association (PRMA) President Rodrigo Masses said comes about “because there is no other choice” to prevent an economic debacle, would constitute a change in Puerto Rico’s legal paradigm. The island has been for decades considered a foreign jurisdiction for tax law purposes as part of the self-governing powers it has enjoyed as a commonwealth.

Gov. Ricardo Rosselló (Jaime Rivera/CB)

“What the [U.S.] tax reform aims to do is totally change the game. In the past, we had the advantage of having tax incentives for being [considered] outside the United States. What this reform does is bring the incentives; brings the candy to the United States so companies, industries and jobs can be created in the United States. Therefore, it is important to keep in mind that whenever we have a discussion about this, making references to models from the past is simply ineffective,” Rosselló said at a press conference Monday.

The U.S. House of Representatives has already approved its version of tax reform, which imposes a 20% tax on Puerto Rico imports. The Senate could vote on its tax bill this week, which could be equally burdensome for the island, the governor said. Final changes for a joint plan will be made at a conference committee.

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Rosselló said that if Puerto Rico wants to create jobs, it must be part of the United States to be able to have economic development tools that serve to grow and maintain the industrial base.

“Seeing that now the game is about the nation’s states having an advantage, Puerto Rico requests that same treatment with the other jurisdictions of the United States,” the governor said.

Lobbying on several fronts

When lobbying members of Congress, Puerto Rico’s government and private sector have asked that the island be excluded from taxes in three areas.

The first seeks to exclude it from a 12.5% tax on patents and intellectual property U.S. subsidiaries would have to pay.

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“This exclusion would be the same treatment given to Michigan, given to New York, that Georgia has, that any of the other states have,” the governor said.

Rosselló also seeks the island’s exclusion from the so-called “base erosion” tax, or 10% on certain transactions made by U.S. firms in foreign jurisdictions.

He also said he wants the island to be considered a free-trade zone so it can have 40% payroll credit granted as well as 50% in research and development credits.

If Puerto Rico is not excluded from the new taxes, the proposed reform will impact more than 240,000 jobs, “and now with the impact of María it could be greater,” said the governor, who emphatically reiterated Puerto Rico would be in peril if not treated like the states.

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Congress approved Promesa more than a year ago to establish a fiscal control board for the island to deal with the financial crisis as well as create economic development tools.

“If Puerto Rico is not included explicitly,” the governor said, “it would go against any economic development initiative because it would take those economic development tools from us, competing directly with any resource we could have at the federal level to rebuild Puerto Rico because it harms our economic base.”

Masses also said Puerto Rico must protect “its manufacturing more than ever” to be able to recover from the devastation left by Hurricane María.

Asked about the mood in Washington to make the amendments, Rosselló said it was complicated because there are many groups requesting to be heard and the biggest challenge is to prevent Puerto Rico from being ignored. However, he added, none of the members of Congress with whom he has spoken opposed making Puerto Rico a domestic jurisdiction for tax purposes.

“The game has changed. Trying to say this is a [section] 936 is simply false and wrong because now the incentive is to be within U.S. jurisdiction,” the governor said in reference to the now defunct tax statute that gave incentives to U.S. subsidiaries on the island.

Differing proposals?

The governor repeatedly stressed that he and Resident Commissioner Jenniffer González do not have differences on tax reform since both want the island to be given fair and equal treatment under the proposed reform. Gonzalez’s push for enterprise zones are proposals that supplement those of the government, he said.

“Some people are always going to try to misrepresent everything, but the truth is we are focused on getting Puerto Rico to be better positioned in this effort,” he said.

Regarding remarks made by González to the effect that anything resembling section 936 will not be approved in Washington, the governor said his proposals are different. “If that was jazz, this proposal is classical music,” Rosselló said.

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However, the governor did not clearly explain which tools Puerto Rico would be able to use in the future to differentiate itself from the 50 states and attract investment. Puerto Rico currently competes with other foreign jurisdictions but is treated as a domestic jurisdiction for labor and environmental law purposes.

Rosselló added that if Puerto Rico were declared a domestic jurisdiction, “it would put us at a competitive advantage over other foreign jurisdictions. It would allow us to bring more jobs to the United States because Puerto Rico is part of the United States.”

Masses, meanwhile, could not explain how foreign companies would be impacted if Puerto Rico becomes a domestic jurisdiction under tax reform. Of the 40 pharmaceutical and medical device companies in Puerto Rico, he said three or four were from foreign countries.

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