Fiscal board: Law broadening some tax incentives is allowable only with certain conditions
By The Star Staff
While the Financial Oversight and Management Board expressed concerns that Act 172 of 2020, which would broaden certain tax incentives, is inconsistent with the fiscal plan, it will allow its implementation with certain conditions.
In a letter to Javier Tirado-Polo, counsel for the Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), the oversight board’s executive director, Natalie Jaresko, said the federally appointed board will allow the law to be implemented “with the understanding and agreement that the annual estimated fiscal impact of Sections 2 and 3 of Act 172 shall be deducted annually from the General Fund transfers to the ‘Appropriations under the custody of Treasury’ line item for ‘Export Development in the Economic incentive Fund, pursuant to law 60-2019’ of the Certified Budget.
She gave the government until Jan. 14 to agree to the condition.
Act 172 of 2020 amends the Export of Goods and Services Chapter of the Incentives Code to mirror Act 73-2008’s export activities provisions related to the preferential tax rate of 12% for royalty payments made to foreign entities. As a result of the amendment, businesses that export goods and services will now benefit from a 12% fixed tax rate for any payment of royalties, rents and license fees by those businesses to a foreign person not engaged in trade or business in Puerto Rico. The legislative intent was to grant the export business the same preferential tax rate in place for manufacturing, the visitor economy, infrastructure & green energy, and opportunity zone.
On Feb. 9, 2021, the oversight board said Gov. Pedro Pierluisi Urrutia acknowledged that Act 172 was inconsistent with the fiscal plan.
The oversight board notified AAFAF to “correct the law to eliminate the inconsistency” or “provide an explanation for the inconsistency that the Oversight Board finds reasonable and appropriate.”
The oversight board also notified AAFAF that the government had not submitted the required formal estimate, Jaresko said.
“As you know, Sections 2 and 3 of Act 172 establish a preferred tax rate of twelve percent (12%) on payments of royalties, rents, and license fees made by certain Puerto Rico export businesses to foreign entities for the use of certain intangible property,” she said. “In his February 9, 2021 certification, the Governor confirmed that Sections 2 and 3 of Act 172 are significantly inconsistent with the Fiscal Plan as their implementation would have an estimated impact on revenues ranging from $11.6 million to $41.3 million.”
The Puerto Rico Treasury Department revised the original estimated impact on revenues to include only those taxpayers with export services decrees under Act 20-2012 or Act 60-2019 and those with royalty payments under those acts.
“Treasury made these adjustments because the prior submission erroneously assumed all royalty payments made by the relevant taxpayers were related to eligible export activities,” Jaresko said.
Nonetheless, Treasury’s revised analysis estimates that Sections 2 and 3 of Act 172 will have a fiscal impact ranging between $81,847 for the current fiscal year and $409,235 for five fiscal years.
“As we have previously shared, the Oversight Board does not agree with AAFAF’s articulation of what is required for a law to be ‘significantly inconsistent’ with the Certified Fiscal Plan,” Jaresko said, adding that the board will allow the law’s implementation with conditions.