Treasury Revenue from Tax-Exempt Companies Drops
SAN JUAN – For the first time since 2005, taxes paid last year by corporations that enjoy tax exemptions under the 2008 Tax Incentives for the Economic Development of Puerto Rico, the 1997 Tax Incentives Act and other credits added up to less than $1 billion.
Treasury collects income taxes and royalties from exempt companies. In 2005, these corporations paid $965 million, and in 2009, $1.3 billion, the most registered in the 10-year period.
Taxes on both sources totaled $910 million in fiscal 2015, $154 million, or 14.5%, less when compared with fiscal 2014 and the lowest amount in 10 years.
The reduction is the result of a $24 million decrease in income tax revenue calculated after tax credits and a $129 million cut, or 18% reduction, on royalties.
Amid the island’s fiscal crisis, payments by companies that enjoy tax credits and exemptions represent 10.2 percent of the general fund’s net revenue, but the numbers are shrinking.
“The trend is these numbers are going down,” reads a Treasury Department report by Secretary Juan Zaragoza.
During the past three fiscal years, the average amount in taxes paid by these companies was $1.007 billion, which is lower than the $1.117 billion average paid from 2010 to 2012.
Broken down, the income tax paid after the credits were taken into account was $322 million, or 35.4 percent of the total. The amount paid in taxes on royalties was $588 million, or 64.6 percent of the total.
Since 2006, the taxes withheld on royalties have been higher than the income taxes, signaling a change in the composition of the taxes.
The behavior of the revenue from royalties could be affected, among other things, by product demand, expiration of patents, amendments to tax laws, federal audits and the general economic situation as well as planning by the corporations themselves.
“In real terms, the main source of income that businesses with incentives contribute to the economy are on the taxes withheld on royalties,” Zaragoza stated.
The amount in taxes on royalties in 2015, however, was the lowest in eight years. In 2014, it was $716 million; in 2013, $756 million; and in 2012, $724 million. The highest amount paid in taxes on royalties was in 2009, when these firms paid $904.7 million.
Pharmaceutical companies and medications contributed the largest share of taxes on royalties in 2015, for a total $515 million; followed by medical devices, with $2.3 million; while computers and electronics paid $68.2 million.
The tax incentives law, Act 73, provides various types of credits to promote different activities and reduce operational costs. Starting in 2008, Act 73 provided exemptions that are also available to businesses that have tax decrees under previous incentive laws, including Act 135 of 1997, and other credits. Unused credits can also be rolled over to future years.
In 2015, $116 million in tax credits were claimed, compared with $157 million in 2014, or $41.6 million less.
“This difference can be attributed mainly to the credits for transfers of investments in technology or credit on royalties, which went down to $2.6 million from $61.9 million, or $59.3 million less. The reduction was prompted by the closing of a unit in a pharmaceutical company as part of a restructuring of its activities on the island,” Zaragoza stated.
The main credit claimed by companies was in manufacturing. Credits under that area went up to $50 million in 2015, from $43.2 million the previous year.
The credit that rose the most, however, was for research and development, which lept to $26.5 million in 2015 from $6.4 million the prior year.
Another substantial credit was for energy. Firms claimed $17.5 million in energy credits, less than the $23.1 million claimed in 2014.
Credits for industrial investments that seek to incentivize companies to acquire exempt businesses that are on the verge of closing or to expand midsize businesses has also been decreasing. According to the report, these went from $706 million in 2012-13 to $94 million the following year. The report did not provide the numbers for 2015.
Records show numerous rolled-over credits. Under Act 73, companies can drag these into the following year until they are used up.
In 2013, there was $735.1 million in unused credits, and in 2014 there was $308.3 million added for a total $1.04 billion. Around $116 million in credits were claimed in 2014 for a total of $901.6 million to be rolled over into future years.
Of that total rolled-over credits, $411 million were for the purchase of manufacturing products, while $216 million was in credits for research and development investments, Zaragoza stated.