WASHINGTON – House Ways and Means Committee Chairman Kevin Brady is working on fixes to pending tax reform legislation to avert what top officials of Puerto Rico say could be another devastating blow to its already tottering economy.
Both the House and Senate bills would end the U.S. territory's status as an offshore tax haven for American companies, which Puerto Rico Gov. Ricardo Rossello is fighting to keep.
Rossello and Resident Commissioner Jenniffer Gonzalez, the island’s sole nonvoting member of Congress, are warning that the island’s slow recovery from Hurricane Maria could suffer an irreparable setback if manufacturers decide to close their factories.
Gonzalez said 40% if the territory’s economy comes from manufacturing, with much of that related to pharmaceuticals.
She is concerned that any drop in the $2 billion of annual revenue these businesses provide are the key to the economic recovery plan instituted by the federal oversight board.
Republican leaders are unlikely to keep Puerto Rico’s status as a tax haven, but they appear to be amenable to changes that would help reboot its economy.
Gonzalez said she wants the territory designated as combined economic opportunity zone, empowerment zone, distressed zone or investment zone.
“We can combine different programs that are already in the U.S. code and apply them to the island,” she said. “Right now they do not apply.”
More 90% of the island already is an empowerment zone, but Gonzalez wants the other programs as well.
“Forty percent of the island is living in poverty,” she said, noting the federal child tax credit only applies to a third child for residents of Puerto Rico. “I don’t know if the policy is to have more babies on the island, but we need it to apply to the first and second.”
The House tax reform bills extend for five years the so-called rum cover that provides an excise tax rebate to Puerto Rico and the U.S. Virgin Islands on locally produced rum.
Puerto Rico produces 77% of the rum consumed in the U.S., according to the Puerto Rico Industrial Development Agency.
Part of the island’s problem is that much of the lobbying from the governor and other officials is focused on keeping the territory as a tax haven.
“Companies with a strong presence on the island would be forced to shutter those operations and decamp for the mainland or, worse, a lower-tax country,” Rossello wrote in a column published Thursday by CNBC. “This would put tens of thousands of U.S. citizens in Puerto Rico out of work and demolish our tax base right as we are trying to rebound from historic storms.”
Brady, R-Texas, told reporters Thursday he met earlier in the morning with Gonzalez “on ideas on how best to help Puerto Rico.”
“I know the Senate too has some ideas as well,” Brady added. “Yeah, we’re going to keep working on that.”
The House bill imposes a 20% excise tax on payments by a U.S. company to a foreign subsidiary. The Senate bill proposes a tax ranging from 12.5% to 15.625% on the income of foreign corporations with intangible assets in the U.S.
Puerto Rico officials and businesses operating there say both bills put the territory at a disadvantage.
“The companies are asking from exemptions from all of this if Puerto Rico is involved,” said a former federal official who specialized in issues involving U.S. territories. “They want to be exempted from the taxes going forward that would prevent companies from accumulating untaxed profits abroad.”
Foreign earnings – which includes money earned by corporations operating in Puerto Rico – could be repatriated at a 14% rate if it’s held in cash and 7% if its illiquid assets under the House bill.
The Senate bill would tax cash at 10% and illiquid assets at 5%.
Companies in Puerto Rico would be taxed at the same rate on the mainland of the U.S. and in foreign countries. In addition, the average manufacturing wage is three times lower in Puerto Rico than on the mainland and companies operating there can claim an 80% tax credit for taxes paid to the territorial government, the official said.
Much of the manufacturing in Puerto Rico is pharmaceuticals, which are not subject to import limits into the mainland.
Senate Finance Committee Chairman Orrin Hatch, however, dismissed an attempt by Sen. Bill Nelson, D-Fla., during a four-day committee markup the tax bill in mid-November to amend the bill by permanently extending the rum cover.
The Senate tax bill would allow the rum cover and the Section 199 deduction for domestic manufacturing production to expire.
“There were provisions in the tax code to encourage business and employment on the island,” Nelson said told the committee. “We shouldn’t be doing this to them financially in the tax code.”
Hatch responded that he wants to help Puerto Rico, but explained during the mid-November bill markup, “I just don’t think it should be in this bill.”
“Let’s sit down and let’s think of ways we can help Puerto Rico, but not in this tax bill,” Hatch said.
Nelson’s amendment was defeated by Republicans in a 14-12 party line vote.
Nelson raised the issue again Wednesday night during the initial Senate floor debate on the tax reform bill.
“I don't think would be a senator in this chamber that would not want help Puerto Rico given the fact that Puerto Rico is going through the ravages of the aftermath of a hurricane where today still just under half of the population in Puerto Rico does not have electricity and it's three months after the hurricane,” Nelson said. “But we're going to send another hurricane to Puerto Rico if we pass this bill because of the provisions that are so punitive to Puerto Rico in this tax bill.”