Puerto Rico's tax overhaul plan took shape this week as the commonwealth's financial authority warned of a likely government shutdown within three months due to a lack of liquidity and ability to sell bonds.
Puerto Rico Gov. Alejandro García Padilla, pressing for passage of a new value added tax in time to include the additional revenue in budget projections for the coming fiscal year, agreed to support a plan by House of Representatives President Jaime Perell- that would reduce the rate to 14% from the proposed 16%. Perell-'s plan also includes a 10% rate for restaurants and prepared food, according to a staff member in the governor's office.
A third key leader in making decisions about Puerto Rico legislation, Senate President Eduardo Bhatia Gautier, had been supporting an 11% consumer tax, alternately reported as a sales tax or a value added tax.
The progress came as the board of directors of the Government Development Bank for Puerto Rico sent a letter to the governor, Perell-, and Bhatia Gautier making dire warnings on the consequences of failing to bolster government finances.
"We've reported repeatedly over the past months that, despite the efforts of this administration, the financial condition of Puerto Rico is extremely precarious," the GDB board wrote. "As fiscal agent and financial advisor of Puerto Rico, it is our duty to warn that a government shutdown is likely in the next three months because of lack of liquidity to operate."
The island currently has a 7% sales and use tax. While sales taxes are charged only by retailers, value added taxes are charged all along the supply chain. The full percentage of the VAT is normally not charged at each transaction. Instead businesses only add to the price of the product the value of the VAT rate multiplied by the value of what the business added to the product.
In addition to a few exemptions from the tax that had already been in the governor's proposal, Perello's bill would exempt private education, healthcare and commercial rent from the tax.
The bill is 2,100 pages long and legislators are being given some time to review it. The House may vote on it on Monday or Tuesday, the governor's staff member said.
The bill would eliminate the patente nacional tax on the revenue of large companies, which was introduced on July 1, 2013.
It includes an exemption from income taxes for individuals who make up to $40,000 a year, an increase from the current $20,000, said Puerto Rico House Rep. Luis Vega Ramos.
Vega Ramos said that the Puerto Rico Treasury has recently come out with more optimistic projections for how much revenue a 14% VAT would generate.
There has been some talk in the legislature of introducing a tax on the large chain stores operating in Puerto Rico. No such tax is currently included in Perell-'s bill, the governor's staff member said.
The current proposal will probably be amended, possibly with the tax on chain stores, Vega Ramos said.
According to the governor's source and news reports, Bhatia Gautier has recently said that he is waiting action from the Puerto Rico House before he decides his position on what steps should be taken with the tax reform.
In their letter, the GDB board cited bankers and potential investors as indicating: "the probability of completing a market transaction to finance government operations and maintain open government is quite remote due to growing uncertainty about the government tax initiatives, particularly the tax reform and budget of the 2016 fiscal year.
"Due to the shortage of liquidity and lack of access to traditional banking and bond markets, it is imperative to take the necessary measures to, first, close the budget gap and projected cash flow for the current fiscal year, including implementing immediate cost reduction measures."
The board also urged the governor and legislators to pass "a five year fiscal adjustment plan to eliminate the historical practice of financing recurrent long-term debt spending and achieve sustainable government through a radical transformation of government structure" and "tax reform whose estimated recurring revenues will meet recurrent expenditures of the central government."
Among the signatories were David Chafey, chairman of the bank's board, Melba Acosta Febo, president of the bank, and Juan Zaragoza G-mez, Secretary of the Treasury. Copies of the letters were distributed to all the members of the Puerto Rico House and Senate.
