Puerto Rico Fears Economic Downturn From New Tax Overhaul

Manufacturing accounts for nearly half of the island's economy and a third of government revenues, generating hundreds of thousands of jobs

The sweeping federal tax rewrite approved Wednesday outraged officials in Puerto Rico, who said it threatens to crush the backbone of the island's economy at a time when they need substantial help recovering from Hurricane Maria.

The bill approved by the Republican-controlled House and Senate contains a 12.5 percent tax on intangible assets that could affect dozens of U.S. manufacturing companies operating in the U.S. territory. Puerto Rican officials accused some federal legislators of turning their backs after they visited the U.S. territory post-hurricane and pledged their help.

"Not only is Congress hurting the people of Puerto Rico in their greatest time of need, but they've gone back on the policy they established," Gov. Ricardo Rossello recently told The Associated Press.

Manufacturing accounts for nearly half of the island's economy and a third of government revenues, generating hundreds of thousands of jobs. Controlled foreign corporations that make up the bulk of Puerto Rico's manufacturing sector and generate more than $2 billion a year for the government are the ones affected by the new tax.

In a best-case scenario, those companies would reduce production here and move some operations to another country, dealing a blow to this island mired in an 11-year-old recession, economist Jose Caraballo said. Worst case, he said, some companies would leave all together as Puerto Rico struggles to attract new investment.

"It's going to have a direct effect on Puerto Rico's budget, which is already in a delicate situation," Caraballo said in a phone interview.

Puerto Rico officials say they are looking for some relief in upcoming federal measures still being debated. Jenniffer Gonzalez, Puerto Rico's non-voting representative in Congress, told the AP that the tax overhaul does allow island officials to create special zones to attract investors, and noted that controlled foreign corporations in Puerto Rico have ways to avoid paying the 12.5 percent tax.

However, Gonzalez said, the bill falls short of what Puerto Rico was expecting.

"The focus should be on the private sector," she said. "There's still room for Puerto Rico to obtain tools for economic development."

Rodrigo Masses, president of Puerto Rico's Manufacturing Association, said in a phone interview that while some companies might be able to absorb the impact of the 12.5 percent tax, it still represents a challenge for them.

"We're going to be seeing that in upcoming months," he said.

Puerto Rico was already struggling economically before the bill was approved and before Hurricane Maria hit three months ago as a Category 4 storm, causing an estimated $95 billion in damage. The island's government also is trying to restructure a portion of its $74 billion public debt load.

The federal tax overhaul now adds more challenges, including forcing Puerto Rico to go head-to-head with its global competitors, said legislator Rafael Hernandez, a member of the island's main opposition party.

"It leaves Puerto Rico without any kind of protection or any advantages," he said by phone, adding that engineers in places like Ireland and Singapore will compete with those in Puerto Rico to develop new lines for the same companies.

Sen. Marco Rubio said the tax in question applies almost exclusively to intellectual property held on the island. For example, Microsoft owns a license on software and then leases it to the company's Puerto Rican subsidiary. They have billions of dollars in assets held there and about 125 employees, he said.

Over the years, Rubio added, local governments in Puerto Rico began to levy a tax on that intangible property and they fear they will lose that revenue stream if the intangible property is moved to another country.

"It's possible some of them might do that," Rubio said, but he dismissed concerns that the bill overall would heavily affect the island's manufacturing sector. "A few (companies) have told us, especially on the pharmaceutical side, that their general sense of it is that moving would make no sense because it's not clear there is any other jurisdiction in the world that's more advantageous logistically and from a tax perspective. And even if they did, the cost of that relocation would far exceed any short-term savings."

Associated Press reporter Kevin Freking in Washington contributed to this report.

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