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  • Writer's pictureThe San Juan Daily Star

Fiscal board: New tax regime may curtail gov’t revenues

Gov. Pedro Pierluisi

By The Star Staff

The Financial Oversight and Management Board for Puerto Rico says that while it supports Act 52-2022, which replaced the Act 154 tax regime for manufacturing firms to ensure Puerto Rico remains competitive, it noted that the new tax regime may reduce commonwealth revenues.

In June, Gov. Pedro Pierluisi Urrutia enacted Act 52, which allows companies to choose a 10.5% tax on industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations that is contained in Act 154, which the latest U.S. foreign tax credit rules do not consider creditable.

The oversight board said it supports efforts to reform the Puerto Rico Tax Revenue Code to ensure stable collections and promote fiscal responsibility and transparency.

“As the multinational companies currently subject to Act 154 consist of several of the largest taxpayers in Puerto Rico, it is imperative that the Commonwealth successfully implement a new tax regime for these companies impacted by the loss of federal creditability of Act 154 tax payments,” the oversight board said in a recent statement.

The companies represent key industries that have made significant capital investments in Puerto Rico and generate a significant part of Puerto Rico’s gross domestic product, the board pointed out. In fiscal year 2021, those companies and their more than 36,000 employees in Puerto Rico also contributed more than $2 billion to the central government’s General Fund via Act 154 payments, corporate income tax payments, royalty withholding payments, and individual income payments, among other revenue contributions. The local economy must retain this manufacturing investment and employment – as well as the associated tax revenue – and a well designed alternative to the current tax regime is critical to that achievement, the board said.

The net impact on revenue collections from Act 52, however, is highly uncertain. The oversight board estimates, for instance, that Act 52 may have a negative impact on commonwealth revenues of as much as $143 million in year one, in certain scenarios. The oversight board said the government, in an effort to maintain revenue neutrality and enable the board to certify that Act 52 is not significantly inconsistent with the Fiscal Plan, must first segregate $250 million from prior year surpluses and set it aside to fund a potential shortfall in collections from the new regime.

“This reserve will allow a backstop against a potential revenue shortfall and will provide a safeguard until the full fiscal implications of Act 52 are understood,” the oversight board said.

Second, the government must agree that implementation of any additional tax incentives for physicians will not occur until an administrative order is drafted by the government and approved by the oversight board which includes assurances of sufficient guardrails to negate the physician tax incentives provision’s potential negative fiscal implications.

The oversight board also said it finds the increase in the conservation easement tax credit from $3 million to $15 million in Act 52 particularly troubling. As one of the measures to maintain revenue neutrality in a prior law, Act 40-2020, the island Legislature reduced the authorized annual limit of conservation easement tax credits from $15 million to $3 million.

“Provisions used as a pay-for in prior laws should not be reversed in subsequent laws, unless this reversal includes a clearly defined offsetting pay-for in the current legislation,” the oversight board. “If the government confirms in writing it will abide by the provisions requested by the Oversight Board to achieve revenue neutrality, the Oversight Board is prepared to certify that Act 52 is not significantly inconsistent with the Fiscal Plan. Should the Government decline to confirm the requirements to achieve revenue neutrality, the Oversight Board reserves the right to take such actions as it deems necessary, consistent with PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act], including seeking remedies to prevent implementation and enforcement of Act 52 as well as to have Act 52 nullified. We hope such action will be unnecessary.”

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