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Puerto Rico Manufacturers Association concerned about impact of US tax reform

By on December 4, 2017

SAN JUAN – The Puerto Rico Manufacturers Association will intensify its lobbying this week to “demand,” not ask, that Puerto Rico be treated fairly and that controlled foreign corporations on the island be excluded, be it partially, from the U.S. tax reform.

PRMA President Rodrigo Masses admitted that the association failed in having changes that would be favorable for the island introduced before the House and Senate approved their respective bills, but was confident that amendments to the legislation would be made while it is consolidated in conference committee in the next 10 days.

“They haven’t taken us into consideration” so far, he stressed.

On right, PRMA President Rodrigo Masses (CB file photo)

Masses acknowledged, however, that the PRMA is worried because it has “friends” in the House but not in the Senate. He indicated that asked Sen. Marco Rubio to help Puerto Rico to prevent the expected economic meltdown if the legislation is enacted as is from exacerbating the current pace of outmigration, as his Florida district already has more than two million Puerto Ricans.

“The only thing Puerto Rico has left after [Hurricane] María is the industrial sector,” Masses said. “Manufacturing jobs are the only thing that can support the economy.” The sector generates about 73,000 direct and 250,000 indirect jobs.

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Former Resident Commissioner Antonio Colorado said Puerto Rico has two options. The first is for the island to be exclude from the taxes that would “annihilate” the economy, such as the 20% on imports found in the House’s bill, and the 12.5% on intangible assets, or intellectual property and patents, in the Senate’s measure.

The second alternative hoped for would be an amendment that all industries in the U.S. Customs Zone be exempt from taxes. Puerto Rico is already part of that customs zone, Colorado said, and has to pay U.S. ships and incur other expenses.

“What we are saying is you can’t compare a CFC [controlled foreign corporation] in Puerto Rico with a CFC in another part of the world. What we are asking for is fairness,” Colorado added.

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Meanwhile, Masses said the latest information he has is that Congress will most likely work on the Senate’s version, which would eliminate the 20% import tax.

“All the attention is focused on the 12.5% that would affect intellectual property,” Masses said.

In addition to an exclusion, the official position of Gov. Ricardo Rosselló’s administration is that the final bill provide Puerto Rico with an “empowerment zone,” a federal initiative to create jobs in economically distressed areas through tax incentives and grants.

“We’re all headed there; although we may have different voices, the reality is we are all” shooting for that, Masses said.

However, last week the governor, along with the PRMA and other private sector organizations, said they would lobby for Puerto Rico to be treated as a domestic jurisdiction, or like a state. Masses insisted, though, that what is requested aligns with what the governor is asking for.

“What we’re talking about is that for 100 years Puerto Rico has been under the customs code, which is domestic for imports and customs purposes, and is defined within U.S. territory. On the other hand, Puerto Rico is in the U.S. Internal Revenue Code, and there they treat us as a non-domestic jurisdiction. Therefore, it’s not difficult to talk about the two contexts because both apply,” Masses explained.

Regarding the options left for the island and what is Plan B if the current stipulations were enacted, Masses said, “We have to achieve that these amendments or changes occur within the next few days.”

The president of the Puerto Rico Chamber of Commerce, CPA Kenneth Rivera, said that would consist of a clause that reads, “except Puerto Rico” or “except those in Customs Zones.”

Masses reiterated that companies in Puerto Rico are in U.S. territory and therefore deserve different treatment than those in Uruguay, China, Ireland or Singapore.

“[We want] companies under section 931 of the Internal Revenue Code, which are therefore CFCs, to be excluded from that imposed tax in order to eventually survive, if any survive this bill,” Masses said.

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In the House, there are at least 10 representatives who have raised their voices in favor of Puerto Rico, but that type of relationship does not exist in the upper chamber despite Sen. Orin Hatch having presided over the Congressional Task Force on Economic Growth in Puerto Rico established by the Promesa law. This is because congressional Democrats are not participating in the process as part of their opposing the measure.

Despite this, Masses said the PRMA will request assistance from Senate Minority Leader Charles Schumer to advocate for the island, as well as continue to ask for Rubio’s support, given he represents Florida and its large Puerto Rican population, and “must rise” to the occasion and “bravely defend Puerto Rico.”

Resident Commissioner Jenniffer González has already said there is no potential for approval of anything similar to the phased-out section 936 of the U.S. tax code, which gave stateside companies an exemption from taxes on income earned in Puerto Rico.

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If the tax legislation is signed without new Puerto Rico provisions, Masses said a way out would have to be evaluated. When section 936 was eliminated, the textile, electronics and other industries left the island, but many pharmaceutical companies reinvented themselves as CFCs. “It’s possible that what it looks like [now] isn’t so bad if I can vary the business model,” he said. “A bad law can have a way out.”

In addition to sending letters and lobbying, CofC’s Rivera was heading Monday with PRMA members to Washington, D.C. Masses said he will join them at the end of the week.

Also on their way to personally lobby Capitol Hill are Puerto Rico’s House speaker, Carlos “Johnny” Méndez, and Senate president, Thomas Rivera Schatz. Last week, the Legislative Assembly passed a resolution to have Puerto Rico considered a domestic jurisdiction in the tax reform.

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