The U.S. Government Accountability Office has produced a new report on Act 60, the Puerto Rico tax law that gives corporations and wealthy individuals a deal on taxes that is intended to develop the Island’s economy, but may just be giving the beneficiaries free rides. The GAO didn’t pull any punches: they titled the report “IRS Should Improve Oversight of Taxpayers Claiming Exemption from Federal Taxes”
Background on Act 60
Puerto Rico’s Act 60, known as the Puerto Rico Incentives Code, is a law that consolidates and reorganizes many of the island’s tax incentive programs into a single framework. Act 60’s stated goal is to enhance Puerto Rico’s economic competitiveness by attracting capital, encouraging job creation, and fostering export-oriented activities. It does this by offering preferential tax treatment to qualifying residents and companies that meet specific requirements, such as operating in targeted industries or relocating to Puerto Rico.
One of the most publicized components is the deal for “resident individual investors,” previously Act 22. Under Act 60, qualifying individuals who become bona fide residents of Puerto Rico can receive substantial exemptions on passive income like dividends, interest, and capital gains. The aim is to attract high‑net‑worth individuals and investors to move to Puerto Rico and invest locally. To qualify, individuals must be present in Puerto Rico for 183 days of the year, and the Island must be their primary tax home.
Act 60 also includes incentives for businesses engaged in exporting services or goods from Puerto Rico to markets outside the island, previously Act 20. These “export services” incentives include a reduced corporate income tax rate on eligible income, partial exemptions from property taxes, and reductions in certain municipal taxes. The law targets activities such as professional services, technology and software development, financial and insurance services, creative industries, and various types of shared service centers. The policy goal is to position Puerto Rico as a hub for service and knowledge-based industries that sell primarily to clients abroad.
Beyond individual investors and export services, Act 60 covers a wide range of specific sectors. For example, there are provisions directed at manufacturing, including incentives for research and development, advanced technology production, and related activities. Tourism-related projects such as hotels, vacation developments, and recreational facilities may receive tax credits and exemptions linked to their eligible investment and operations. Other sections support infrastructure, energy projects (including some green energy initiatives), agriculture, and the “visitor economy” more broadly, reflecting a strategy to use tax policy as a tool across many parts of the island’s economy.
A central feature of Act 60 is that benefits are usually granted through individual tax exemption decrees, which the GAO describes as individual contracts between the beneficiary and the territorial government.
Effects
The GAO calculates that hundreds of people have benefitted from Act 60, and that federal coffers have lost hundreds of millions of dollars each year since Act 6o became law. They explain that they can’t tell how much the territorial government has lost. “Puerto Rico’s economy has shown little or no growth since the resident investor and export service business tax incentives were first introduced in 2012,” they point out, “but it is not possible to measure what growth or decline would have been without the incentives.” They continue, “It is also not clear if these incentives are generating economic activity equal to the revenue the government forgoes to offer them.”
“Hacienda projects that from 2020 through 2026, the Puerto Rico government will forgo $4.4 billion as a result of the resident investor incentive and $1.8 billion in revenue as a result of the export service business incentive,” the GAO reports. However, the beneficiaries might not have moved to Puerto Rico at all without the incentives, in which case they would not have owed the higher taxes that the government is doing without.
Increases in housing costs have been a major concern on the Island as high net worth individuals buy up properties and live in them part time, while using them as short-term rentals the rest of the year. There is a feeling that local residents are being pushed out of the housing market. However, the GAO found that housing costs have risen less in Puerto Rico during this time than they have in the U.S. as a whole. This may be a general problem rather than a specific problem, even though in Puerto Rico it is exacerbated by Act 60.
The overall conclusion in the report is that the number of beneficiaries of Act 60 is probably not large enough to have major effects on Puerto Rico’s economy as a whole.
IRS actions
The GAO found that the IRS did not have adequate data to check on compliance among Act 60 beneficiaries. For example, they didn’t have a list of all the Social Security numbers of beneficiaries until the GAO sent them a list. They had asked the territorial tax office, Hacienda, for information and had not received it. They waited a full year before asking again. The IRS explained that auditing high net worth individuals and making sure they actually lived in Puerto Rico was difficult. The report also pointed out that Puerto Rico has experienced natural disasters in the time frame.
All that said, the GAO recommends that the IRS step up their efforts to make sure Act 60 recipients are following the rules, and also suggested educating them on the requirements with letters explaining what they should do to meet the requirements.
Response from Congress
In response to the report, the Democratic side of the House Natural Resources Committee (the committee that covers U.S. territories) drew a firm conclusion: “These tax breaks are draining hundreds of millions in federal revenue while delivering next to nothing for Puerto Rico’s working families.” That’s a statement from Ranking Member Jared Huffman.
“This GAO report makes clear that Act 60 is falling far short of its promises. Despite the generous tax breaks it provides, there is little evidence that the program is delivering meaningful economic benefits for Puerto Rico. Without stronger oversight and real accountability for those who profit from these incentives, Act 60 risks functioning more as a loophole than a development tool. Puerto Rico deserves a program that truly strengthens its economy, not one that leaves its impact in doubt,” Rep. Ritchie Torres added.
Would statehood help?
States make their own local tax rules, just as Puerto Rico does. No state is exempt from federal income tax, because no state is in such a poor economic position that Congress believes its people can’t afford federal taxes. This is the reason Congress had for the exemption of Puerto Rico in the first place. The sad truth is that states all do better financially than territories. In fact, the 32 states which used to be territories all do better as states than they did as territories.
As a state, Puerto Rico would have a level playing field. The idea that crippling tax breaks are the only way to encourage companies to invest in Puerto Rico is not true for the territory of Puerto Rico, and it certainly would not be believed about the state of Puerto Rico. The Supreme Court said that a territory does not have “the dignity of a state.” Act 60 may be a slap to Puerto Rico’s dignity. As part of a path to statehood, Puerto Rico may need to rethink the current tax structure.
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