Parés Alicea asks US Treasury to exempt PR from proposed FTC rules

By The Star Staff

Puerto Rico Treasury Secretary Francisco Parés Alicea has asked the U.S. Treasury secretary to exempt Puerto Rico from proposed Federal Tax Credit (FTC) regulations under evaluation because they would eat up the lion’s share of the island’s tax collections and budget.

The petition, addressed to Treasury Secretary Janet Yellen and to Mark Mazur, the assistant secretary for tax policy, highlights that Act 154 is the main source of Puerto Rico tax collections and accounts for 50% of the island’s gross domestic product.

“On behalf of Governor Pedro Pierluisi, we submitted formal recommendations to the federal Treasury Department, establishing firstly that Puerto Rico should be exempted from the changes that are being worked on because we are American citizens and a territory of the United States,” Parés Alicea said.

Parés Alicea asked that the proposed regulations be amended to include an exception (carve-out), regarding the source of income of a Puerto Rico resident so that it complies with certain jurisdictional requirements in the proposed FTC regulations.

If the U.S. Treasury Department decides against exempting Puerto Rico from the FTC rules, Parés Alicea requested a transition period of three years to negotiate with companies and find an alternate source of revenues for the island’s budget.

The proposed FTC rules being evaluated by the federal Treasury Department would address the creditability of taxes on digital goods that are becoming part of the tax system of many nations. Under the proposed FTC regulations, any income taxes paid under foreign tax laws that fail to require sufficient nexus between that foreign country and the taxpayer’s activities, investment of capital or other assets that result in the income being taxed will not qualify for the FTC. The regulations impact Puerto Rico because companies would not be able to claim as a credit the excise taxes paid in Puerto Rico against their federal taxes because Puerto Rico is considered a foreign jurisdiction for federal tax purposes.

“The transition period that we are requesting would allow the local government to model a new tax that generates sufficient income to replace Act 154, and that at the same time we avoid the instability that an abrupt change can generate in the economy, the possible exodus of companies and an increase in unemployment,” Parés Alicea said.

In the comments submitted to the U.S. Treasury secretary, Parés Alicea said companies that pay the Act 154 tax should be allowed to claim a credit against their federal taxes.

He noted that despite being considered a foreign jurisdiction for tax purposes, residents of Puerto Rico are subject to federal income taxes on their worldwide incomes, the same as all U.S. citizens, with the exception of income earned from Puerto Rico sources.

“The foreign countries that are imposing digital goods taxes on U.S. companies are truly foreign and the taxes they collect go to foreign Treasury departments for use in supporting foreign government programs,” the letter reads.

Pierluisi and Parés Alicea have looked for alternatives to the tax changes. The Treasury chief has held talks since last September with officials from the Tax Policy division of ​​the federal Treasury, highlighting the implications for the island’s economic activity that the new regulations would impose.

Asked about alternatives to the tax, Parés Alicea said officials are exploring recovering the $2 billion in revenues using an income tax mechanism, but he acknowledged that the models fall short of yielding that amount. The agency is making modifications to a proposal that the tax can apply not only to the goods that are manufactured on the island but also when only part of that product is made here, in order to increase the production lines that can be set up in Puerto Rico, he said.

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