Despite governance crisis in July, Puerto Rico tax revenue exceeds projections

Puerto Rico Treasury Department headquarters in San Juan (CB file)

Treasury chief attributes record collection to corporate activity

SAN JUAN — The government crisis that led to the resignation of former Gov. Ricardo Rosselló in July did not affect the Puerto Rico Treasury Department’s tax revenue that month, which exceeded estimates and reached “historical” levels, Treasury Secretary Francisco Parés announced Tuesday.

Preliminary general fund net income during July, the first month of fiscal 2020, totaled $1.05 billion, some $305.5 million, or 41.2 percent, more than the same month last year, Parés said in a release, noting that the figure exceeded estimates by $159.9 million.

The Treasury chief attributed the month’s record-breaking revenue mostly to income tax collections resulting from “economic activity by corporations.” Corporations on the island paid $255.7 million in income taxes, nearly three times the $89.5 million paid the same month last year. July’s corporate income tax revenue exceeded projections by $101.9 million, or 66.3 percent. Parés simply said it was “attributed to a particular business transaction of a company that resulted in payment of taxes.”

Another big revenue driver was Act 154’s 4-percent excise tax, paid by stateside companies on their purchases from Puerto Rico-based subsidiaries, the official said. The hugely successful tax has become the focus of controversy after U.S. Treasury Secretary Steven Mnuchin reportedly told Gov. Wanda Vázquez’s administration to prepare for the eventual elimination of the federal tax credit that allows stateside manufacturers on the island to offset the impact of the excise tax. He said the tax does not align with President Trump’s corporate tax reform to bring business back to the United States. For tax purposes, Puerto Rico is considered a foreign jurisdiction.

The Act 154 excise tax generated $383.4 million in July, a 53 percent increase compared with the $250.1 million collected the same month last year. The July figure is $35.9 million above estimates, Parés added. Act 154 collections rose 8.8 percent, or $168.3 million, between fiscal years 2018 and 2019. Revenue in this category, which constitutes almost one-fifth of general fund revenue, rose from $1.68 billion in fiscal 2018 to $1.83 billion in fiscal 2019.

Individual income tax collections totaled $143.3 million in July, $13 million, or 10 percent, more than in July 2018. Revenue in this category exceeded estimates by nearly $8 million, Parés said.

However, Treasury also registered declines in other major revenue categories, including the sales and use tax (IVU by its Spanish initials). IVU collections totaled $91.6 million in July, a drop of $10.8 million, or 11 percent, compared with July last year, when Treasury received $102.4 million. The July figure was nearly $9 million below estimates.

IVU collections for July totaled $179.3 million, Parés said without providing the year-ago total. He said the method used to register IVU payments was modified in July due to the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) adjustment plan resulting from an agreement with bondholders in February.

“Under the new methodology, [IVU] payments received will be registered at the moment the tax return is filed,” the Treasury chief said. “For this reason, some payments made in the month of July will be reflected in the month of August starting on the 20th, the deadline for filing the monthly IVU return.”

Motor vehicle excise tax collections totaled $34.2 million in July, a $9.7 million drop compared with last year, but $10.5 million above estimates. Excise tax collections on alcoholic beverages reached $20.7 million, a $1.7 million decline versus July 2018, but $10.5 million more than estimated.

Meanwhile, non-resident withholdings fell 30 percent, from $51 million in July 2018 to $35.7 million in July this year. Estimates in this category were off by $17.5 million.

Parés said last month that projected tax revenue for fiscal year 2020 is expected to drop by nearly 9 percent due to the planned cut of the IVU on prepared food from the current 11.5 percent to 7 percent, which starts Oct. 1, as well as to enacted income tax cuts, and the earned-income tax credit.




Puerto Rico gov’s office: Mayors oppose measures sought by fiscal board

(Screen capture of https://twitter.com/fortalezapr)

Claim sustainability of towns questioned, will be ‘forced’ to continue making healthcare, retirement system payments

SAN JUAN — After meeting with the director of the federally created fiscal oversight board for Puerto Rico, the chairman of the island’s Municipal Revenue Collection Center (CRIM by its Spanish acronym) governing board publicly opposed the former’s proposals, saying they threaten the fiscal health of towns.

“During the meeting that took place Tuesday afternoon, it emerged that the [fiscal oversight board] is totally opposed to Act 29, which exempts municipalities from the responsibility of paying ASES [Spanish acronym for Health Insurance Administration] and the Pay as you Go (PayGo). Likewise, it was informed that the Board would be going to the Federal Court to force the municipalities and the CRIM to comply with the directive to prepare a budget that contains the continuation of payments to ASES and Retirement [system],” CRIM Chairman Javier Carrasquillo said in a release issued by the governor’s office, La Fortaleza.

Carrasquillo, who is also mayor of Cidra, Puerto Rico, stressed that “these actions will have a devastating effect on the coffers of the municipalities, the majority of which are in a difficult fiscal situation.”

Gov. Ricardo Rosselló’s municipal affairs adviser, Omar Negrón, said the governor “fully supports” the mayors’ position and opposes the fiscal board’s proposals.

The fiscal board, Negrón said, “intends to aggravate the economic situation of all of Puerto Rico. These measures represent a serious fiscal problem for the municipalities because they do not count on the money of the Matching Fund. The governor has been emphatic in his defense of the municipalities and will fight any economic measure that threatens the 78 municipalities and the services they offer.”

The adviser, who according to the release also denounced that fiscal board Executive Director Natalie Jaresko “questioned the sustainability of maintaining 78 towns in Puerto Rico,” added that the fiscal panel “wants the mayors to look for new opportunities for their municipalities, but is choking them economically.”

Negrón further said in the release that during the meeting with the CRIM board, Jaresko “never presented alternatives to Act 29 nor offered suggestions or recommendations on how to address the fiscal problem in the short term.”

The meeting was also attended by the mayors of Bayamón, Aibonito, Orocovis, Maunabo and Juncos, as well as CRIM Executive Director Reinaldo Paniagua and José Santiago, representing the island’s Fiscal Agency and Financial Advisory Authority).




Puerto Rico launches online medical cannabis platform

SAN JUAN – In a release issued Thursday by Gov. Ricardo Rosselló’s office, La Fortaleza, it was announced that an online platform “that seeks to significantly streamline the licensing processes and the registration of patients who benefit from the Medicinal Cannabis Program” will be fully operational next week.

Currently in Argentina, the governor was quoted as saying that the “most recent statistical data indicate that 32,276 patients in Puerto Rico are using medical cannabis as an option for medical treatment. Given this, we have created this tool with the purpose of facilitating a more effective access for both doctors and patients and that the community in general can benefit.”

The website, which is managed by the Health Department’s Medicinal Cannabis Regulatory Board, can be used by patients to provide their medical recommendation and documentation to receive certification, “which could result in a greater number of beneficiaries,” according to La Fortaleza.

(Screen capture of http://licenciacannabis.salud.gov.pr)

Use of the website is optional, but will include a yet-to-be-specified, additional charge for the required identification card versus personally visiting the Medical Cannabis Office to process the request. Nevertheless, the platform is touted as an alternative to carrying out the process confidentially.

Online, patients can renew their registration, which is valid for one year. The Health Department, meanwhile, will be using the site to collect “statistical data and information metrics, such as age, conditions and demographics.”

Doctors who currently participate in the cannabis program can provide medical recommendations directly to a patient’s account, while physicians who have yet to be authorized to recommend the plant’s use can apply for their license on the site as well.

La Fortaleza pointed to the new website, licenciacannabis.salud.gov.pr, and wrote that, “according to studies, among the most relevant conditions for the use of medicinal cannabis are anxiety disorder, followed by chronic pain and arthritis,” adding that the platform’s creation “gives access to a variety of treatments and is part of the Rosselló Nevares Administration’s public policy to provide patients an alternative that allows them to improve their quality of life and achieve optimum health.”

Editor’s note: As of this writing, the licenciacannabis.salud.gov.pr website lacks an encrypted connection, thus any information entered could be intercepted. “It is expected the platform could be available at maximum capacity for all interested next week,” according to La Fortaleza.




Uphill Battle for Puerto Rico Treasury to Monitor Online Transactions

Editor’s note: This article first appeared in the June 12-18 print issue of Caribbean Business

While it is true the U.S. Supreme Court cleared the way for treasuries to charge local taxes on transactions between taxpayers and businesses that do not have a physical presence in states and territories, the struggle for Puerto Rico to enjoy this advantage in the short term looks troublesome.

That is because, for the Puerto Rico Treasury to collect its 11.5 percent sales & use tax (IVU by its Spanish acronym), it would have to implement an efficient auditing system that allows it to account for the transactions an online company reports versus the purchases consumers carry out—all while ensuring the exercise does not result in an undue burden on the Interstate Commerce Clause.

Héctor Román Maldonado, a lawyer & economist, said that for Treasury to take advantage of the new rule of law following the South Dakota v. Wayfair case, it will have to analyze having to create a reliable mechanism in which the agency can make sure the taxes charged by the companies are correct.

“I predict a high degree of tax evasion. The [P.R. Treasury] Department must be able to audit inventory. That is the solution for what is reported to correspond with the shipments,” predicted Román Maldonado, who was the chairman of the Puerto Rico Senate Labor Relations, Consumer Affairs & Employment Creation Committee during the former administration.

“Right now, we are moving toward a strong domestic market where Puerto Rico has lost many natural taxpayers and large corporations. Therefore, having a strengthened domestic market, where people are actively looking to buy outside of Puerto Rico to try to avoid an 11.5 percent tax that is quite high, you have to create the credits and exemptions among chain participants, so one oversees the other with the least possible intervention. That’s why the VAT [value-added tax] was talked about so much; it helped with that oversight,” the Universidad Metropolitana professor added.

Discreet, static revenue estimate

Although the 5-4 decision issued by soon-to-retire U.S. Justice Anthony Kennedy ratifies the power of states and territories to impose taxes on all electronic commerce, Puerto Rico’s Treasury Department has preferred to maintain its conservative forecast of $40 million in revenue for this fiscal year.

“One of the priorities of this administration is to create tax equity, and that these taxes are not missed by fictitious advantages of entities,” Francisco Parés Alicea, deputy secretary of the Treasury Department’s internal revenue division, told Caribbean Business. “There must be room to educate these entities to recognize that they are obliged to collect the sales & use tax, so the position of the [local Treasury] Department is that it would still be $40 million, and once legislation is presented, that estimate would be re-evaluated. It is still too early to say the Wayfair case allows us to double our estimates; it would be irresponsible on our part.”

The revenue projection was disclosed following the signing of a confidential agreement reached between the agency and retail giant Amazon, and after scores of companies voluntarily stipulated they would comply with Act 25 of 2017. This law was approved so all foreign corporations that do business with Puerto Rico consumers submit a report through the Suri system with the names and addresses of those customers, so Treasury can compare them with the returns it receives. At that time, the IVU collection rate was about 67.9 percent.

In February 2017, the chairman of the P.R. House Treasury Committee, Antonio “Tony” Soto, said that of the $600 million increase expected by the administration of Gov. Ricardo Rosselló, as a result of raising the capture rate to 85 percent, $100 million to $125 million would come from online purchases. The numbers, which do not distinguish between transactions made by companies with or without a physical presence on the island, contrast with Treasury’s estimate.

In fact, the state that succeeded in getting its law to collect taxes to pass the U.S. Supreme Court test, estimated that $50 million to $58 million is lost in transactions between its taxpayers and online companies with an “extensive virtual presence.” South Dakota–which has a sales tax of 4.5 percent, with city governments able to charge an additional 2 percent–only had 869,666 inhabitants as of 2017, according to the Census Bureau. With 3.3 million residents, Puerto Rico has nearly four times as many residents.

Matter of evasion

“In Puerto Rico, we don’t know a real number [revenue estimate] because there are no credible data on the amount in the e-commerce market that is subject to taxes. Many people see electronic commerce from the point of view of sales, but it also includes goods that are going to be used in Puerto Rico for which a transaction doesn’t exist. Therefore, the degree of tax evasion will be quite high and we have seen that in the Treasury reports,” the economist emphasized.

How will online retail sales in Puerto Rico be affected?

In Román Maldonado’s opinion, e-commerce businesses won’t lose too many customers despite the fact the online retail market suffered a severe blow after the Supreme Court granted a reprieve to brick-and-mortar stores, which had been warning for years that this type of direct competition in the acquisition of goods without charging taxes would lead to their demise.

“This will delay the inevitable a few years, which is that as time goes by, we will have less physical presence, fewer shopping centers, less commercial square footage, because people are moving more and more toward doing electronic transactions. For consumers, this will mean they won’t be able to enjoy the advantages of buying between one or the other [physical versus online store], but that is part of what a competitive market should be, where companies pay what they should,” said the economist, adding that the greater problem lay in the capacity and will of each jurisdiction in controlling evasion.

“The Department of Treasury doesn’t have the resources to effectively control this type of electronic transaction, so I see Treasury leaning more toward reaching agreements with the major economic agents to facilitate the collection of public funds. I don’t see the Treasury as a great [tax] inspector,” Román Maldonado said. Nevertheless, he expressed hope that the agency could become an effective oversight entity in the future.

 




Treasury: October revenue exceeds October 2015’s by more than $70M

SAN JUAN – Treasury Secretary Juan Zaragoza Gómez reported that General Fund net revenues totaled $700.1 million in October, exceeding October 2015 revenues by $73.4 million, or 11.7%, and estimates by $74.5 million, or 11.9%.  

Treasury Secretary Juan Zaragoza

Treasury Secretary Juan Zaragoza

Zaragoza Gómez pointed out that thanks to October’s improved performance, revenues for the first four months of fiscal year 2017 are back on positive territory from September’s underperformance. In October, most income and consumption tax categories registered increases compared with October 2015 and to estimates. Fiscal year-to-date (July-October) revenues totaled $2.64 billion, up by $75.3 million, or 2.9%, from October 2015, and exceeding estimates for the same period by $59.7 million, or 2.3%.

October sales and use tax (IVU by ts Spanish acronym) collections totaled $199.3 million, an increase of $18.3 million, or 10.1%, year-over-year (YOY).  Fiscal year-to-date (FYTD) IVU revenues total $824.8 million, an increase of about $120.9 million YOY. The FYTD allocation to the Sales Tax Financing Corp. (Cofina by its Spanish acronym) is $471.3 million, a rise of $15 million YOY, and $353.5 million have gone to the General Fund, for a $105.9 million YOY increase. In addition, IVU revenue exceeded estimates for the same period by $23.1 million, or 7%.

The Treasury secretary highlighted that fiscal year-to-date revenues to the General Fund exceed budget projections.




Why It Matters: IRS

FILE - In this photo March 22, 2013 file photo, the exterior of the Internal Revenue Service (IRS) building in Washington. Politicians love trying to use the tax code to highlight their goals to voters. This year, it’s a battlefield between Hillary Clinton, who wants to boost levies on the rich to pay for expanding social programs and Donald Trump, who says cutting taxes would gird the economy. The clash has consequences for the rich, poor and those in the middle. (AP Photo/Susan Walsh, File)

In this photo March 22, 2013 file photo, the exterior of the Internal Revenue Service (IRS) building in Washington. Politicians love trying to use the tax code to highlight their goals to voters. (AP Photo/Susan Walsh, File)

WASHINGTON – THE ISSUE: The Internal Revenue Service touches everyone, not just taxpayers but anyone who receives a government check, drives on roads made possible by tax revenue or sends a child to a school helped by Washington. It’s a touch that can come with a heavy hand, in the eyes of critics who believe the agency’s far-reaching powers are abused and the agency needs to be cut down to size.

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WHERE THEY STAND

Republican Donald Trump’s most explicit views about the agency have been on the personal level – he says he’s been under a continuing multi-year IRS audit and that’s why he won’t release his tax returns, as other presidential candidates do. He’s also boasted that his use of business losses to zero out his tax liability shows he’s smart. Trump’s tax plan reduces the number of tax brackets but does not envisage dismantling the IRS as its fiercest critics want.

Democrat Hillary Clinton has said little about the powers of the IRS except to suggest Trump would use them to go after his opponents. She’s sure to fight attempts by congressional Republicans to cut the agency’s budget.

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WHY IT MATTERS

No one loves the IRS.

Many Republicans, though, unlike most Democrats, talk of abolishing it. That idea never materializes. Even a smaller government could not function without an agency responsible for collecting revenue and going after tax cheats.

IRS Commissioner John Koskinen says it’s one thing to simplify the tax code – a good idea, he offers – but another to think the country can get by without tax collectors. “You could call them something other than the IRS if that made you feel better,” he’s said to the critics.

With some 90,000 employees, a massive stockpile of information on citizens and powers to dig deep into the lives of those it decides to investigate, the IRS is in the face of Americans like no other agency. That’s become even more so since it was handed the job of enforcing the mandate that people carry health insurance.

The potential for abusing power is obvious, and it has happened – most vividly at the hands of President Richard Nixon but also in the administrations of John Kennedy, Franklin Roosevelt and more, historians say.

During the Obama administration, the IRS has acknowledged mistreatment of tea party groups by subjecting them to excessive scrutiny in their bid for tax-exempt status. But investigations by the Justice Department and the IRS’ independent inspector general found no evidence that actions against the conservative groups were politically motivated.

Koskinen took over after the IRS actions in question but has not been clear of the controversy. Conservative lawmakers pressed unsuccessfully to impeach him, accusing him of lying to Congress, not answering subpoenas and overseeing an agency that destroyed documents in the tea party case. He denied the accusations and told lawmakers that when he testified in June 2014 that no documents had been destroyed since congressional investigations began, he didn’t know that IRS workers had mistakenly destroyed backup tapes bearing thousands of emails.

As for getting rid of the IRS altogether, even libertarian-leaning analysts say that’s a stretch. Chris Edwards of the Cato Institute, a former senior economist with Congress’ Joint Economic Committee, says even the most simplified tax code would require 10,000 to 20,000 tax collectors. “If you’re going to have federal taxes, you need an agency to collect them,” he said.

The Libertarian Party presidential candidate, Gary Johnson, says he’d like to eliminate the IRS and any other federal agency that Congress might vote to dismantle. But that, he has said, would take “a magic wand.”