Proposed tax reform would provide estimated overall tax relief of $545 million
Gov. Pedro Pierluisi
By THE STAR STAFF
Gov. Pedro Pierluisi Urrutia announced on Monday a tax reform proposal that would provide tax relief to individuals and corporations of close to $545 million, and simplify tax structures.
The proposed legislation has yet to be introduced in the Legislature and would need the green light of the Financial Oversight and Management Board. Treasury Secretary Francisco Parés Alicea and Secretary of State Omar Marrero Díaz were present at the meeting. A study on the impact of the proposals is still pending.
“As I have expressed on several previous occasions, my vision for the future of Puerto Rico includes that our island be a jurisdiction with low taxes and easy compliance with tax liability, so that we can compete favorably with other states and territories, as well as with other parts of the world, by attracting population, commercial activity and capital investment,” the governor said. “Our proposal represents a step in the right direction to achieve a more equitable tax system for our residents. We are lowering the tax rates for citizens and companies that do business in Puerto Rico. Our island is very well on the way in its economic recovery, and the statistics clearly show it.”
The proposed reform would reduce the individual’s maximum rate paid to 30% from 33%, which is much lower than stateside.
“In addition, we are lowering to 24 percent the tax rate for people with incomes from $41,500 to $61,500 -- which today pay at a tax rate of 25 percent,” Pierluisi said. “This is important since, currently, the maximum tax rate of 33 percent is for people with incomes of $61,500 or more. The 24 percent rate will apply to income from $41,500 to $81,500, which could mean a seven percent reduction for some taxpayers and, consequently, a great tax relief for the working class who did not benefit from the Work Credit.”
Meanwhile, the 5% and 3% discounts established by Law 257-2018 and Law 40-2020, respectively, for taxpayers with income of $100,000 or less, remain unchanged. “Senior” taxpayers, or people 65 years of age or older, will have a $400 credit and thus the condition that they must exceed certain collection figures for payment of an additional $200.
The fiscal impact of the proposed tax changes to individual taxpayers is approximately $262.5 million.
The governor proposed simplifying taxes for corporations. Currently corporations are subject to a marginal tax rate of 37.5%, which is made up of a fixed normal tax rate of 18.5%, and an additional marginal tax rate up to 19%.
“Our proposal contemplates replacing the current combined regime with a much simpler and more progressive regime starting at a rate of 17 percent for companies with net income of up to $275,000,” the governor said. “For businesses with income from $275,001 to $3 million, a rate of 27 percent is proposed, which represents a reduction of 10.5 percent in the tax rate. Finally, those businesses with incomes greater than $3 million would be subject to a maximum rate of 33 percent.”
Pierluisi noted that out of a universe of 53,000 corporate taxpayers, only 27,411 (or 51.7%) have tax liability. He added that under this proposal, around 23,747 corporate taxpayers would pay at a maximum rate of 27%, which would be at a tax rate similar to the average at the national level.
“The maximum rate of 33 percent that we propose represents a reduction of 4.5 percent, compared to the current rate,” Pierluisi said. “But the maximum rate of 27 percent that would apply to small and midsize businesses represents a reduction of 10.5 percent compared to the current rate. These changes have an estimated fiscal impact of approximately $283 million.”
Regarding the sales and use tax, the reform proposes to eliminate the payment in the distribution chain (import and purchase of inventory for resale).
He claimed that the change would have the effect of eliminating the value added tax (VAT) features of the current system to achieve a pure sales tax system.
“This new exemption system proposes to establish an electronic mechanism for merchants to report their inventory sales to resellers and create a digital Exemption Certificate for merchants who import or purchase inventory for resale,” Pierluisi said.
Parés Alicea, meanwhile, discussed the results of the control efforts and actions to combat tax evasion that the government has carried out and how they are being perceived. He stressed that much remains to be improved to achieve a more equitable system and the latest proposal is a step in that direction.
The Treasury chief said the effectiveness of the measures to increase compliance has been reflected in the net revenues to the General Fund over the past five years, which have consistently exceeded the Fiscal Plan projections certified by the Financial Oversight and Management Board. The trend suggests that General Fund revenues will remain at a level similar to that of the past two fiscal years.
“Considering that the average excess in collections, compared to what was projected, is approximately $790 million, this tax relief will have the effect of redistributing the tax burden of individuals and corporations by more than $500 million,” Parés Alicea said.
The official added that the simplification measures that are being proposed are also the result of the work and recommendations of the Advisory Group to simplify and improve the tax system of Puerto Rico, created by the governor in October 2021.
The Financial Advisory Authority and Fiscal Agency and the Treasury Department are collaborating on the preparation of an economic study on the impact of the tax proposals.