New Tax Bill’s Effect on Puerto Rico

There’s a lot of concern right now about the new tax bill’s effect on Puerto Rico. Congress is trying to push tax reform through before the end of the year, and many observers, including the chairman of the Puerto Rico House of Representatives’ Federal, International and Status Affairs Committee, José Aponte Hernández, foresee serious consequences from its treatment of Puerto Rico.

Since much of the concern centers on Puerto Rico’s future appeal to businesses, we have to point out that taxes may not be the biggest issue for economic development in Puerto Rico. Investors and entrepreneurs alike will expect roads, electricity, running water, and basic sanitation, as well as a stable population of workers. The rebuilding of Puerto Rico is an essential factor in drawing in businesses.

Some medical manufacturers shared with NPR how difficult it has been to keep their factories running. One company said they needed to hire 300 workers, while another said they’ve had trouble hiring because communications are still difficult.

Others have reported that they’re providing food and water for workers to take home and laundry services so their employees can function in spite of the destruction on the Island. “We have a talented and skilled workforce there,” a representative from one company said. “And we continue to see a future on the island.”

How the tax bill will affect Puerto Rico

But the tax bill, officially called the Tax Cuts and Jobs Act, is about taxes. And the same manufacturers who are working to get things back to normal at their factories are concerned about a provision in the new bill. Part of the new tax plan is an effort to stop U.S. companies from sheltering their profits in foreign countries. When a U.S. company creates a subsidiary in Ireland, for example, they pay much less in taxes on that subsidiary’s income than they pay on the income produced in the United States.

The new tax bill will impose a 20% tariff on  goods made by a U.S. company’s foreign subsidiary and sent to the United States. So, if a company makes a product in Ireland and brings the product into the U.S. to sell it, they’d have to pay an extra 20%. The idea is to make it more appealing for U.S. companies to manufacture items in the United States.

This shouldn’t affect Puerto Rico. Puerto Rico is not a foreign country. It belongs to the United States. It is a territory of the United States, to be exact.

But from the standpoint of U.S. taxes, Puerto Rico is treated like a foreign country. It is a foreign jurisdiction, meaning that it follows the same rules, when it comes to these taxes, as Ireland would.

This change would make it more expensive to manufacture goods in Puerto Rico and ship them to the States. Manufacturers might choose to build factories in Florida or North Carolina instead of in Puerto Rico if they faced a tariff for building in Puerto Rico.

Is this an oversight?

This question often comes up in relation to Puerto Rico. When the territory was unable to use Chapter 9 to cope with PREPA’s debt, it was discovered that Puerto Rico had at one time been able to use this kind of bankruptcy protection. Somehow, that was changed in the 20th century, though no one could remember why.

Puerto Rico is also not eligible for D-SNAP, special food assistance in case of disaster which is available to every state and most territories. Not to Puerto Rico. Here again, there is no explanation for this.

Resident Commissioner Jenniffer Gonzalez-Colon assured Caribbean Business that this little oversight would be fixed before the new tax bill is passed.

The specific language in the bill’s summary doesn’t mention Puerto Rico. Here is how the relevent parts of the bill are described:

 

  • modifies the taxation of foreign income, and
  • imposes an excise tax on certain payments from domestic corporations to related foreign corporation

 

All that is needed is an amendment that says Puerto Rico is a domestic jurisdiction, not a foreign jurisdiction. With that change, Puerto Rico would not face the problem of being a more costly place to make goods.

The solution

The chairman of the Puerto Rico House of Representatives’ Federal, International and Status Affairs Committee, José Aponte Hernández, has called on the federal government to declare Puerto Rico a domestic jurisdiction.

He has also gone a step further, telling Caribbean Business that Congressional action  on statehood should “go hand in hand” with the vote on the tax bill.

[Statehood] would also give companies the security provided by the political certainty provided only by a federated state, which would encourage more national and international companies to relocate to the island, creating thousands of new and better jobs for Puerto Ricans.

As a state, Puerto Rico would be a domestic jurisdiction, and would be unaffected by the proposed change.

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