Bond analysts and Puerto Rico political leaders were voicing concerns Friday that the Republican federal tax bill reportedly holds a new tax on Puerto Rico and other U.S. territories.
Puerto Rico’s nonvoting representative in the U.S. Congress, Jenniffer González Colón, said that the Republican tax reform bill will have a 12.5% tax on intangible property imported from foreign countries and that for this tax Puerto Rico and other U.S. territories would be treated as foreign countries. On Friday morning the El Vocero news website reported González Colón’s statement.
The taxed intangible assets would include things like trademarks and patents generated abroad.
Congressional Republicans were scheduled to unveil the tax reform Friday evening.
On Friday morning González Colón tweeted in Spanish, “The colony today is now portrayed…. The tax reform benefits domestic, not foreign companies.” González Colón is a Republican but, more importantly for Puerto Rican politics, a leader of Puerto Rico’s New Progressive Party, which supports statehood for the island. “While we are a colony there will be more legislation like this passed,” she tweeted.
Gov. Ricardo Rosselló tweeted: “Unfair taxes show a lack of commitment and consistency from leadership in Congress; showing true hypocrisy.”
The Federal Affairs Administration of Puerto Rico released a statement Friday calling for the tax bill to be changed and for additional aid to recover from Hurricane Maria. The tax proposal could “destroy 75,000 jobs and wipe out a third of [Puerto Rico’s] tax base,” it said. Puerto Rico had a 10.6% unemployment rate and 963,655 employed residents in October, according to the U.S. Bureau of Labor Statistics.
“Obviously, any tax law change that makes Puerto Rico less competitive for certain industries to expand or remain on the island is a negative for bondholders who really need the economy to stabilize and grow in order to help in their debt recovery,” said Howard Cure, director of municipal bond research at Evercore.
Shawn Burgess, portfolio manager and analyst at Cumberland Advisors, said, “My understanding is that this would impact foreign corporations operating on the island and not necessarily U.S. companies. However, it is a travesty for Congress to treat Puerto Rico as essentially a foreign entity at a time when they need all the assistance they can get. Those are U.S. citizens and deserve to be treated as equals.” Cumberland owns insured Puerto Rico bonds.
“Leave it to Congress to shoot themselves in the foot,” Burgess continued. “They had voiced their support for helping the commonwealth financially and they hit them with tax reform terms that could be a detriment to their long term economic health.”
Moody’s Investors Service Puerto Rico analyst Ted Hampton said, “In view of Puerto Rico’s economic fragility – which was exacerbated by Hurricane Maria – new federal taxes on businesses there would only serve as additional barriers potentially blocking path to recovery. In creating the [Puerto Rico Oversight, Management, and Economic Stability Act] oversight board, the federal government declared its intention to restore economic growth in Puerto Rico. New taxes on the island would be at odds with that mission.”
Edwin Melendez, director of the Hunter College Center for Puerto Rican Studies, said, “It is too early to estimate the potential impact of the proposed tax bill on Puerto Rico. Assuming that a 12.5% tax on all imports from the territories of intangible property, such as trademarks and patents, is enacted as law, other aspects of the bill may have a mitigating or harmful effect on Controlled Foreign Corporations depending on the final bill and how these firms react to the new law.”
Melendez explained, “First, consider that the new territorial tax system will impose a minimum 10% global tax on all profits, which is lower than the proposed federal tax rate of 21%. The parent company of a CFC may attribute charges for intangible property to either the parent or subsidiary operations through internal pricing to minimize their tax liability on a global scale -- very much as they do now. The question is what are the restrictions to such transfers and what portion of their overall production would actually be affected by intangible property.
“Second, in the case of Puerto Rico it is important to confirm if the Corporate Alternative Minimum Tax is repealed and whether the Puerto Rico 4% excise tax could be deducted in the future as a business expense,” Melendez said.
In the background of Puerto Rico concerns about the impending tax reform is the result of a tax change agreed to in 1996. At House Speaker Newt Gingrich’s initiative, Pres. Bill Clinton reached a deal to allow the phasing out of section 936. This section of the federal tax code had allowed U.S. corporations to pay reduced taxes on incomes made in Puerto Rico.
The benefit was ended in 2006 and Puerto Rico’s economy has contracted every year except for one since then. Many economists point to the end of this benefit as being part of the reason for the decline.
Section 409 of PROMESA established an eight Congressional-member Congressional Task Force on Economic Growth in Puerto Rico, which released its report in December 2016. In the report’s section on tax treatment of Puerto Rico, the task force said, “The task force believes that Puerto Rico is too often relegated to an afterthought in congressional deliberations over federal business tax reform legislation. The Task Force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform legislation.”
Second, “The Task Force recommends that Congress continue to be mindful of the fact that Puerto Rico and the other territories are U.S. jurisdictions, home to U.S. citizens or nationals, and that jobs in Puerto Rico and the other territories are American jobs.” Third, the task force said it was open to Congress providing companies that invest in Puerto Rico “more competitive tax treatment.”
On Friday, Rosselló tweeted that people should read the Congressional leadership’s “OWN guidelines on the task force report. Three main points, did not follow a single one.”