Wednesday, October 16, 2019

The Writing on the Wall

By on September 20, 2019

Editor’s note: The following was first published in the Sept. 19, 2019, issue of Caribbean Business, the Front Page report for which delves further into the threat to Act 154.

If there is any truth to the Beatles’ classic song “Taxman”—“Let me tell you how it will be; there’s one for you, 19 for me. Should 5 percent appear too small, be thankful I don’t take it all”—the administration of Gov. Wanda Vázquez ought to be counting its lucky stars that the creditability of Act 154 is going to be phased out over a three-year period and not over a fortnight.

As this newspaper was going to press, two Capitol Hill sources told Caribbean Business that the governor’s team will be working with U.S. Treasury policy wonks to prepare models to replace the 4 percent excise tax paid under Act 154 by multinationals operating in Puerto Rico—which is credited by the U.S. Treasury against certain federal taxes—for a phaseout and replacement.

Thankfully, members of former Gov. Ricardo Rosselló’s administration, led by former Treasury Secretary Teresita Fuentes, had gotten a beat on new tax models to anticipate the demise of the tax credit. Fuentes told Caribbean Business that she met with former Treasury Secretary Melba Acosta, who under the pro-commonwealth Gov. Alejandro García Padilla had spent countless hours working with U.S. Treasury teams trying to secure a permanent ruling from the Internal Revenue Service on the creditability of the excise tax. The most they obtained was a notice—not an opinion—to allow a five-year extension of the tax’s creditability.

Fuentes told this newspaper that Acosta helped her tremendously, setting the groundwork for the models she drafted.

Sadly, Fuentes was unable to conclude her work as she resigned because she had ethical concerns with the administration prior to the governor himself resigning during a summer of massive discontent when a highly offensive chat between him and his cabinet members became public.

So, chickens have come home to roost and it is time for the next man up, Treasury Secretary Francisco Parés, to make quick work of the tax craft engineered by his predecessors. Two sources close to the matter told Caribbean Business that Parés had a productive meeting with Acosta. He will have about six months to present palatable proposals to the U.S. Treasury, which would unfurl over a three- to five-year period.

Time to get cracking.

Act 154 was one of the top revenue generators for Hacienda in fiscal 2019, with some $1.83 billion collected, up from $1.68 billion in fiscal 2018. This constitutes almost one-fifth of the $11.38 billion in net general fund revenue last fiscal year.

The writing was on the wall—that the tax credit was not permanent—long before its inception. When it was first passed under the administration of then-Gov. Luis Fortuño, the governor had near corporate mutiny on his hands because large stateside companies operating in Puerto Rico—those selling more than $75 million to their U.S. mainland distributors—felt hoodwinked as the tax was passed over a weekend without debate.

During a recent interview with Caribbean Business, Fortuño expressed he might have done it differently. However, he knew that the creditability offset would be attractive to stateside companies. First, the governor needed a solid legal opinion, which he obtained from Steptoe & Johnson. With that in hand, he signed the law and jetted for Washington, D.C., where he met with Treasury officials to present the legal opinion that secured the notice of creditability.

The five-year excise tax was to have commenced at 4 percent, scaling down to 1 percent in its final year prior to phaseout. The tax, projected to generate $1.2 billion in its first year, was to have complemented the drop in revenue provoked by a very attractive tax reform.

The truth is that for all the revenue generated, Act 154’s excise tax credit has been the source of uncertainty among U.S. companies—because of the way it was first passed; because it was extended twice, in 2013 and then again in 2017. And not a single person could say for certain whether a permanent ruling would be obtained.

In fact, back during the García Padilla administration, two people close to the process with the U.S. Treasury told this newspaper the thorny issues were stuck in the labels—whether to call Puerto Rico “foreign” or “domestic.” The folks at Treasury were presented with three different options to fit the island under a territorial label, which is where we stand today.

In his work chiseling out a new formula, we wish Parés Godspeed and the vision to know that we should not put all our eggs in one basket. Figure out how to create jobs that can pay taxes. No more gimmicks—se nos va la vida.