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Bill replacing 4% tax on CFCs headed for conference committee


Senate Treasury Committee Chairman Juan Zaragoza Gómez

By The Star Staff


During the last day for the Legislature to pass bills, the Senate passed an amended version of the House bill that replaces the 4% excise tax paid by certain controlled foreign corporations, also known as CFCs, with an income tax.


Senate Treasury Committee Chairman Juan Zaragoza Gómez said “the objective [of the measure] is to provide the legal mechanism for companies that are subject to the Act 154 tax on foreign companies to transition and move to the taxes contained in the revenue and royalty code.”


“The transition is mandatory because the U.S. Treasury Department at the end of the year will no longer allow these companies to take a credit in their federal taxes for the 4% excise tax paid in Puerto Rico,” he said. “The tax represents 20% of the general fund revenues, or about $2 billion.”


“The existence of this credit will end on December 31, 2022 and this requires changes in the law,” Zaragoza added. “This model must be yielding $1.6 billion versus the $1.3 billion that it yields now. … The difference would be about $200 million. You could say the game is tied. … We are well on our way to closing the chapter on eliminating a significant contingency from the general fund collections.”


The bill is slated to go to a conference committee that will create a single version of the bill as the House was expected to reject the changes made by the Senate.


The proposed legislation calls for the 4% excise tax, which is currently paid by firms with gross sales of $75 million or more, to be replaced with a fixed income tax rate of 10.5% on the income from industrial promotion of sales of products or services of the firms.


The measure also states that if the United States amends its Internal Revenue Code to impose an income tax rate of a least 15% on the income of a controlled foreign corporation, those companies will then have to pay that 15% instead of the 10.5% rate. Companies that wish to remain under the regime of Law 154 can do so and remain there indefinitely.


The Senate removed certain provisions from the bill, including one that would allow any individual investors to benefit from Act 20 tax incentives.


Sen. Gretchen Hau spoke in favor of the bill and stated that “as a defender of the best well being of our [economic] development, I think it is important to promote any measure to create jobs and new opportunities.”


“With the amendments introduced we can encourage companies to continue contributing to the economy and benefiting small and medium-size businesses,” she said.


The bill also would create a tax credit manager in the Treasury Department to facilitate the administration and control of tax credits.

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