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  • Writer's pictureThe San Juan Daily Star

House passes bill that aims ‘to create certainty’ in the tax system

House Finance and Budget Committee Chairman Jesús Santa Rodríguez

By The Star Staff

The island House of Representatives on Wednesday passed House Bill (HB) 1367, which would replace the 4% excise tax paid by foreign controlled corporations.

The measure seeks to amend the Internal Revenue Code and laws on tax incentives “to create certainty about a tax system that helps the country pay the money it needs to achieve its development,” said House Finance and Budget Committee Chairman Jesús Santa Rodríguez, who filed a positive report on HB 1367. The bill now moves on to the Senate.

“This report is a sample of the work being done by an active constitutional body in the process of approving the most important law for our Country,” the Popular Democratic Party (PDP) lawmaker said. “Within this consensus, the competitiveness of Puerto Rico must be safeguarded, as a destination that wishes to retain and attract capital investment in manufacturing, so essential for the economic and fiscal stability of our people.”

The bill, filed by the PDP and the New Progressive Party (NPP), seeks to address the tax scheme imposed on the manufacturing sector after the approval of Act 154-2010, also known as the Law to Establish a Tax on Foreign Corporations.

Law 154 adopted a modified source of income rule and a temporary excise tax that applies when the gross income of the corporation exceeds $75 million. The tax was established as a temporary measure that would be phased out after six years from the date the law was signed in 2010.

The bill came after the U.S. Department of the Treasury set an expiration date on the federal credit that foreign companies located in Puerto Rico can claim for the 4% excise tax they pay locally. Although it did not mean the elimination of the tax as such, the move forced the island government to look for alternatives before Jan. 1, 2023 to encourage the long-term presence of foreign controlled companies and avoid a decrease in revenues from the tax, which represents 20% of the government budget.

According to the preamble of HB 1367, the legislative proposal would avoid any effect generated by the Law 154 regime on government coffers. That objective, established in the legislation, was also endorsed by the government’s fiscal component, which participated in a June 13 public hearing on the bill.

According to a paper presented at a public hearing by Treasury Secretary Francisco Parés Alicea, the legislation also considers potential changes that could occur in the near future with respect to the proposals made by the administration of President Joe Biden, in order to protect the permanence of manufacturing companies in Puerto Rico.

HB 1367 also includes amendments to add changes to Act 22, known as the Law to Encourage the Relocation of Individual Investors to Puerto Rico, in order to “do justice to all Puerto Ricans, and guarantee the same opportunities for competition on equal terms. The change will allow all individual investors to apply for certain tax benefits.

According to the amended statement of reasons, Act 22 created unfair competition, “because the residents of Puerto Rico are assuming a greater tax burden than that of individual investors, thus limiting their ability to compete on equal terms because that group is exempt from paying taxes.”

Changes were also made to Act 73-2008, known as the Law of Economic Incentives for the Development of PR, to make the economic incentives for the development of the island more flexible and adjusted to the needs of the market.

The Financial Oversight and Management Board warned in a letter to lawmakers that the bill had to be revenue neutral and objected to the inclusion of other amendments to the tax system, referring to the Act 22 changes.

Later on Wednesday, Gov. Pedro Pierluisi Urrutia said care must be taken with changes to the taxes on foreign companies, since they must comply with the guidelines set by the U.S. Department of the Treasury.

“That is another piece of legislation that has been changing. They inform me, but I have not seen that the legislation was modified in the House to address the recommendations and remarks made by the secretary of the Treasury,” the governor said in response to questions from the press. “So, if that is so, that is very positive because here you have to understand, our secretary of the Treasury, myself as well, but the secretary of the Treasury with his team has been in regular communication with the United States Department of the Treasury and we are following the guidelines that the United States Department of the Treasury has given us because, that is crucial, because if we do not follow the guidelines of the Treasury Department, then the companies will not be able to claim a credit for what they pay us. And that would hurt the sector tremendously.”

“Here we must be very careful with the changes that are made to … legislation like this, related to [Law] 154,” Pierluisi added. “Here the form and manner in which these companies are going to pay their taxes is being changed, but we are doing it in coordination with the [federal] Treasury Department. … We have to comply with those guidelines that the federal Treasury Department has given us.”

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