Dangerous Coronavirus Fix: Tax Tricks for Puerto Rico

Peter J. Ferrara wrote in Issues & Insights that some are proposing a dangerous coronavirus fix: namely, tax changes for territories that would make Puerto Rico once again a tax haven for the convenience of multinational corporations.

Ferrara is referencing Section 936, a tax deal that allowed corporations to wash funds through Puerto Rico without paying taxes — or creating many jobs, either. “The problem is that the history of the prior law did not result in job creation,” as Ferrara points out, “but merely tax avoidance.”

Endangering statehood

“For those seeking statehood for Puerto Rico, this tax proposal, if enacted, would end that idea,” sys Ferrarra, “because any corporation that relocates some operations to Puerto Rico will be motivated to fight statehood to preserve the Commonwealth’s tax haven status.”

Equality for Puerto Rico will not be desirable for those whose goal is to oppress Puerto Rico. If “oppress” seems like too strong a word, consider that pharmaceutical companies gained on average $2.67 for every dollar they spent in Puerto Rico under Section 936. Clearly, the goal was to enrich the companies, not Puerto Rico.

In fact, Puerto Rico continued to have higher rates of poverty than any of the 50 states. Federal funding for expenses like Medicaid and nutrition assistance were and are unequal to the federal funding of states under the same programs. It is easy to see that being a tax haven was never good for Puerto Rico. Bringing the benefits of this kind of arrangement back to the territory would enrich some, and they would be motivated to keep Puerto Rico from becoming a state. A state, with the same rights and responsibilities of the other states under the U.S. Constitution, would be in a stronger position.

Endangering the economy

Section 936 didn’t bring wealth to Puerto Rico. Microsoft, as Ferrara reports, saved billions of dollars in taxes but hired just about 200 workers in Puerto Rico.

“What would work to move manufacturing from China to the U.S., and recreate the booming economy nationwide, ” Ferrara suggests, “would be immediate expensing (deductions) for investing in plant and equipment in the U.S., and a payroll tax holiday for the rest of the year.”

For Puerto Rico, continuing investments in education and infrastructure could make a bigger difference. Manufacturers need reliable electricity. U.S. manufacturers who run factories in Puerto Rico typically have gas-powered generators to keep the lights on, but “dirty” (unstable) electricity can destroy the delicate machinery that keeps industrial automation running.

The Industrial Internet of Things, including the sensors and data management that are increasingly essential in modern factories, also require stable telecommunications. Sensors gather data about everything from temperature to machine vibrations to human operator actions and feed that data into the cloud, where it is used for management of the plant. This kind of information makes it possible to predict needed maintenance, get quick awareness of human workers who may be injured or ill, and to keep the supply chain working smoothly. Without reliable internet service, modern factories can’t take advantage of this technology.

Roads and shipping are in better condition than they were in Puerto Rico’s manufacturing heyday, but they have to be maintained. Cutting the territory’s revenue by slashing taxes won’t provide the infrastructure and workforce manufacturers want.

Endangering the United States

Why is the idea of tax tricks being connected with the coronavirus? America’s supply chain for medical goods is in trouble. Surgical masks, basic medications, and medical devices are in short supply. The United States has been concerned about over-reliance on China for these goods, and the coronavirus has made this a matter of urgency.

Puerto Rico already has 49 pharmaceutical manufacturing plants and a strong, educated workforce accustomed to the protocols involved in medical manufacturing. Puerto Rico is the ideal place for American companies to step up production.

Getting mired in questionable tax tricks is not the way to increase needed production for essential goods during the pandemic. Making an investment in Puerto Rico’s infrastructure and taking advantage of the Island’s experience is the right way to go about it.

One Comment

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Thanks to Mr. Ferrara for clearly stating that PR statehood cannot happen under current PR tax heaven exclusions. PR cannot have it both ways, hope for statehood and keep operating as a “foreign entity for tax purposes”. I would add that PR locals need to start paying federal income taxes – they would be far better off than they are now. The federal IRS defines local PR residents as “non-resident Aliens”- this is not only discriminatory, it allows the local PR banks to come up with all sort of “legal scams” – approved by PR Hacienda in terms of investment tools. The latter means that local PR residents have practically no investments tools in PR other than bank stocks or the “Funds local Bank sell” – that “are approved by PR Hacienda”. These local Bank mutual funds are costly and not competitive. . The “scam” is that they are advertised as being a tax heaven for local investors – they are expensive and their performance is hideous- whatever tax benefits they have , you simply loose in bank fees and poor returns. The locals would be best serve by having direct access to the investment tools every other mainland resident has. There is no doubt that the only way forward for PR is to be under the absolutely same tax rules as the other 50 States. Subsequently, PR can join other states (Texas, Delaware, Nevada) with competitive individual and corporate tax rates. PR has the workforce and the island Beauty to be successful in that venture.

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