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Legislature yet to vote on a replacement for 4% tax on CFCs


Puerto Rico Manufacturers Association President Carlos Rodríguez

By The Star Staff


The island Legislature has yet to vote on legislation that would replace the current 4% tax on controlled foreign corporations, also known as CFCs, imposed under Act 154 of 2010.


The U.S. Treasury has said Act 154 is incompatible with federal law and must be phased out by the end of this tax year.


Organizations representing the manufacturing sector earlier this week rejected a measure, House Bill 1367, at a House hearing that would replace the excise tax with a tax rate on industrial development income (IDI) of 10.5% that could increase to 15% under certain circumstances. The Treasury Department supports the bill.


Manufacturers Association President Carlos Rodríguez said House Bill 1367 would cause several of the companies that currently pay the 4% to carry lower tax burdens while increasing the tax burdens of others.


“Regime change that has already discriminated against certain types of businesses will now be artificially charged to an even smaller group of businesses to sustain government revenues,” Rodríguez said. “That alone is not equitable, but it exacerbates the poor fiscal policy already established by Law 154.”


The entities that currently pay the Act 154 excise tax are those whose gross income exceeds $75 million against their tax obligations under the United States Internal Revenue Code.


In its written testimony, the Manufacturers Association requested language changes that could allow the island to increase its tax rates.


“We refer to potential amendments to the provisions of the GILTI [Global Intangible Low-Taxed Income] in the Federal Internal Revenue Code and changes that are contemplated as part of international initiatives promoted by the OECD [Organization for Economic Cooperation and Development],” Rodriguez said.


Pharmaceutical Industry Association (PIA) President Rafael Castro also rejected the measure because, he said, it does not provide for a maximum tax burden limit. In addition, it does not provide exemptions or credits in the context of royalty taxes.


Enacted in 2010, the Act 154 excise tax is a 4% tariff on products made in Puerto Rico and acquired by the manufacturers’ parent company. The tax represents about 20% of the island’s budget revenues.


The IRS has allowed companies to receive a foreign tax credit for tax payments made in Puerto Rico, and the island has used Act 154 to lure pharmaceutical, aerospace and other manufacturing companies. While fewer than 40 entities rely on the concession, those companies provide tens of thousands of jobs and represent about 15% of the island’s annual tax revenue.


Treasury Secretary Francisco Parés Alicea has said he has hammered out a tentative deal with the U.S. Treasury that will allow the island to swap the excise tax for a 10.5% local income tax while still allowing businesses to take the foreign tax credit. But it requires the Legislature to pass enacting legislation.

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