Por Jeffrey Farrow
Some companies from the States operate in Puerto Rico directly vs. through ‘Controlled Foreign Corporations.’ They pay Federal income tax on their territorial income at the normal 35% rate. For the past several years, they have been able to deduct nine percent of their profits from their taxable income under the Domestic Production Tax Deduction, effectively reducing their tax rate to about 32%. The deduction is not available for income from production outside the U.S.
Camp’s bill would phase out the deduction — he would already lower the normal tax rate from 35% to 25%.
The deduction, created in 2004, is ongoing law for income from the States. Although the Senate included income from Puerto Rico in its bill, Puerto Rico income was excluded after Resident Commissioner Acevedo opposed inclusion. He was lobbying for the proposal of Governor Calderon to effectively recreate Internal Revenue Code Section 936 in Section 956 — a proposal that was rejected. In fact, the Senate Finance Committee included income from Puerto Rico in its domestic production deduction bill precisely because it was opposed to the 956 proposal. Resident Commissioner Fortuno later got income from Puerto Rico qualified for the deduction but on a temporary basis since the tax committees were already planning to develop the tax reform legislation that we are now seeing.
The current temporary provision expired last December 31st, altong with about five dozen other temporary provisions of tax law. President Obama has not proposed extension of most, also because of the interest in a reform of the Federal tax system. New Senate Finance Committee Chairman Wyden (D-OR), however, has said ‘tax extenders’ will be an early priority for him. Chairman Camp has resisted calls to pass tax extenders, reportedly thinking that it will take away some determination and some revenue needed for comprehensive tax reform. Senate Finance Ranking Minority Member Hatch (R-UT) and House Ways and Means Republicans have said that not all of the extenders ought to be passed; each should be judged on its individual merits. I have not heard controversy, however, about extending the deduction for income from Puerto Rico as long as the deduction (Sec. 199) is available for income from the States.
The Congress’ Joint Committee on Taxation estimated in August 2012 that including income from Puerto Rico would cost the Federal treasury $236 million in 2013 and $122 million in 2014. (Even though the deduction expired in 2013, there are costs this year because of when companies pay their taxes.) With every dollar of the cost of the deduction representing about $33 in income, the deduction represents a lot of economic activity in Puerto Rico.
* 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.
