Puerto Rico recently passed a law that lets U.S. citizens who move to Puerto Rico avoid taxes on capital gains and on income from local businesses, so long as the income results from investments made after taking up residence in Puerto Rico. This special deal is reminiscent of earlier corporate tax arrangements in Puerto Rico which were designed to encourage investment in Puerto Rico by companies on the mainland.
From 1976 until 1996, corporations paid almost no taxes for proifts earned in Puerto Rico under the Possessions Tax Credit, part of section 936 of the Internal Revenue Code. Not only did these companies avoid federal taxes, but they often were able to make individual deals with the government of Puerto Rico to avoid local taxes as well. Following modifications in 1996, the tax breaks effectively ended in 2006. Many U.S. companies simply diverted their Puerto Rican earnings to the Cayman Islands or another tax haven. They did this not by moving the factories, but by moving the address.
These corporations weren’t employing lots of people in Puerto Rico to gain these tax-free earnings. A company might have 200 workers in Puerto Rico and 4500 in Seattle, but claim that most of their earnings were sited in Puerto Rico. The value for Puerto Rico was limited.
And yet there are those who say that Puerto Rico needs tax incentives. There are even those who say that statehood would be a bad idea for Puerto Rico’s economy because the Island would lose the power to offer special tax incentives to industry.
Business experts disagree. They suggest that Puerto Rico could draw more industry by focusing on improving infrastructure. Logistics (transportation) issues can be significant in Puerto Rico, and energy costs are very high. Working on these obstacles to industry could pay off in the long run.
Beyond the views of Puerto Rican politicians or mainland business pundits, however, there is some simple data that can easily answer the question of how important tax tricks are for Puerto Rico.
Unemployment is higher in Puerto Rico than on the mainland. Average income is lower in Puerto Rico than on the mainland. Puerto Rico is coping with enormous debts, a shrinking economy, and financial woes beyond what most states have ever seen. If the tax breaks were good for Puerto Rico, things would be different.
This post was originally written in English and may be being auto-translated by Google.