Puerto Rico governor accepts board's demands on foreign-firm replacement tax

Puerto Rico Gov. Pedro Pierluisi has reluctantly agreed to the Puerto Rico Oversight Board's three main demands concerning its Act 52 replacement tax on foreign firms, which allows its enactment to replace Act 154.

The tax accounts for 16% of the island's general fund.

The board earlier this month threatened to block the new law, which Pierluisi signed in late June, unless he took steps to make sure the law would be revenue neutral. On Friday, Pierluisi acceded to the board's demands but said they were "excessive and arbitrary." 

Bloomberg News

The board's demands included the creation of a $250 million reserve fund; a reduction of the maximum value of the conservation easement tax credit; and freezing implementation of a physician tax incentive.

Act 154 is an excise tax on the revenues of foreign corporate subsidiaries based in Puerto Rico, which will be financially untenable as a result of a U.S. Treasury change effective Jan. 1. Act 52 will be an income tax on foreign corporations rather than an excise tax. 

Calling Puerto Rico's economic development a main objective of his administration, and in an effort to provide "certainty to our economic environment ... the government confirms that it will adopt the measures recommended by the board," Pierluisi wrote in a letter to Board President David Skeel.

Pierluisi called "excessive" the requirement that his government create a $250 million reserve against possible shortfalls in Act 52's revenues and keep it until Dec. 31, 2025. 

Act 52 would have increased the conservation easement tax credit to $15 million from $3 million, but the board opposed this and made Pierluisi reject it. As for the physician tax incentives, it won't be implemented until the addition of "guardrails" to prevent potential negative revenue impacts. 

In a different conflict between the board and Pierluisi, the board may be moving toward suing the governor on a recently enacted labor law, as it threatened to a week ago. The law, Act 41, undoes some pro-employer rules put in place five years ago. Specifically, it cuts the probationary period for new employees; reduces the number of hours required for a Christmas bonus; mandates sick and vacation day benefits for part-time employees; increases wrongful termination indemnity pay; and requires employers to prove dismissals are justified. 

Pierluisi seemed resigned to the suit, as he told the El Nuevo Día news web site Sunday, "We are going to litigate it. ... It makes all the sense in the world that we improve the employment offer, that there be a reasonable vacation period for all employees in Puerto Rico, including those in the private sector. And the changes that were made are not radical, they are measured, and what they are looking for is to make it more attractive to work."

Act 41 imposes "new restrictions on employers [that] will deter new hiring, adversely affect the labor market, harm the economy, and have a negative impact on commonwealth [government] revenues," according to the board.