Puerto Rico Gov. Luis Fortuño ­Monday signed into law a tax-reform initiative that could provide $1.2 billion of annual tax relief for families and corporations for the next six years.

Effective immediately, businesses will pay fewer taxes, with the tax rate for the commonwealth’s largest businesses dropping to 30% from 41%. In 2014, corporations making $750,000 or more will pay a tax rate of 25% and those making less than $750,000 will have a 20% rate. The previous tax code had seven different tiers.

Households will receive an average tax cut of 25% in 2011, with that increasing to an average 50% cut by 2016. The changes for individual taxpayers will take effect immediately and workers will begin seeing the tax boost in their paychecks, said Carlos Garcia, president of the Government Development Bank for Puerto Rico.

The administration believes the tax relief will help spark business growth and investment and encourage household spending. That may help offset the anticipated decrease in tax collections and chip away at a 15.7% unemployment rate.

“I am convinced that cutting corporate and individual taxes will encourage job creation, promote entrepreneurship and position Puerto Rico as the most attractive place to do business in the country,” Fortuño said in a statement.

In addition, the government on Jan. 1 implemented a temporary 4% excise tax on corporations not based in Puerto Rico that generate a profit off of products made on the island. That tax is expected to generate $1.4 billion of new revenue in 2011. The 4% tax will decrease gradually and end in 2016.

Non-local corporations that pay the excise tax are expected to receive a matching credit on their federal tax returns. While the administration has received legal opinions that businesses can apply the excise tax as credit against their federal taxes, Puerto Rico’s Treasury ­Department has asked the Internal Revenue Service to release a ruling on the issue, Garcia said.

The law stipulates that certain goals must be met in order for Puerto Rico to continue reducing taxes beyond 2013. Expenses cannot exceed 99% of net revenue in 2014 and cannot surpass 98.5% in 2015 and 2016, Garcia said. In addition, the island’s gross national product must reach at least 1.5% growth in 2014. Officials project GNP to be .4% in fiscal 2011, its first positive growth in four years.

“There are three tests to maintain a very fiscally responsible government in Puerto Rico,” Garcia said. “And that should be a comfort, not only to the people that are getting the benefits, but it should be a comfort to our investors and our bondholders.”

Puerto Rico residents and businesses do not pay federal income taxes.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.