Por Jeffrey Farrow
Most manufacturing in Puerto Rico is done by subsidiaries of companies based in the States organized in foreign tax havens to avoid Commonwealth as well as Federal taxation. Income of the subsidiaries is not federally taxed unless transferred to the parent company, when it would incur a 35% corporate income tax liability.
Puerto Rico lowers its corporate tax rate to not more than 2% through long-term agreements in the cases of the subsidiaries. It also levies a 4% excise tax on parent company purchases of their products. Companies can claim a Federal tax credit for payments to the insular government.
U.S. House of Representatives Ways and Means Committee Chairman Dave Camp’s proposal to comprehensively reform the Federal tax system would lower the corporate income tax rate to 25% for income from the States and the District of Columbia. It would also lower the effective rate to 1.25% on income from outside of the States and DC — U.S. possessions such as Puerto Rico in addition to foreign countries.
It would additionally, however, require taxation of income from manufacturing products developed in the States or DC (intellectual property/intangible assets such as patents and trademarks) in foreign countries or U.S. possessions at the normal tax rate (25%) in the case of goods made for the U.S. market and 15% in the case of products sold abroad. The tax would apply to the extent that the income is not taxed in a foreign country or U.S. territory up to 25% or 15% as appropriate.
Most of the subsidiaries’ products were developed in the States. Some four-fifths are sold in the States. So, most goods manufactured in Puerto Rico would have to be taxed at 25% of income by the Federal or territorial governments.
Gov. Garcia and some companies lobbied for an exemption from the tax rates on intellectual property or for a lower rate for products made in U.S. territories. PRFAA Dir. Hernandez Mayoral last week said he was “optimistic” of success. Camp rejected the idea, as had then Senate Finance Committee Chairman Max Baucus when they made a similar request of his tax reform proposal last fall.
Res. Comm. Pierluisi has proposed that Federal revenue from the new taxation be granted the insular government, similar to the Federal grants of taxes on rum made in the territory and foreign countries. The idea would not conflict with tax reform goals, as would the requests of the Governor and companies, according to congressional tax committee staff.
Puerto Rico taxation of the income or Federal grants of tax revenue would alleviate the territory’s budgetary problems. Some revenue could be used to make Puerto Rico more business friendly (without giving companies back tax revenue). Companies would not have a tax incentive to go elsewhere because no location would offer lower taxation.
Camp’s reform is comprehensive covering personal as well as business taxation. Another option would be to treat low income workers in Puerto Rico equally in the refundable portion of the Child Tax Credit, a credit Camp would expand, and extend the refundable portion of the Earned Income Credit which Camp would reform. These measures would effectively add to wages to the benefit of workers as well as employers and put money into Puerto Rico’s economy since the workers would spend the payroll tax refunds. The President’s Task Force on Puerto Rico’s Status has recommended equal eligibility of Puerto Ricans in the refundable Child Credit.
* El autor es consultor en asuntos gubernamentales en Washington y presidente de la junta de directores de The Oliver Group, Inc. Entre 1994 y 2001, Farrow fue el principal asesor sobre asuntos de Puerto Rico en La Casa Blanca.
