WASHINGTON – Officials from Puerto Rico want members of Congress who are negotiating a final tax reform bill to consider a few options to improve the treatment of the territory.

That’s because the worst outcome -- being overlooked entirely – is where the territory now stands under the two different tax bills passed by the Senate and House.

The United States is moving toward a territorial tax system for businesses that would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations that operate there.

Manuel Laboy Rivera, Puerto Rico’s secretary of the Department of Economic Development and Commerce
Manuel Laboy Rivera, Puerto Rico’s secretary of the Department of Economic Development and Commerce Brian Tumulty, The Bond Buyer

Those subsidiaries, which receive favorable treatment under current law, are facing the possibility of paying a new 20% federal excise tax on all pharmaceuticals, medical devices and other products shipped to the mainland.

But this territory, which is home to 3.4 million U.S. citizens and was recently ravaged by Hurricane Maria, already is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection.

It’s a predicament that officials such as Manuel Laboy Rivera, Puerto Rico’s secretary of the Department of Economic Development and Commerce, say that Congress shouldn’t overlook.

A bipartisan congressional task force last December, in fact, called for changes in the tax treatment of the island.

The Congressional Task Force on Economic Growth in Puerto Rico said, "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."

The task force specifically recommended that the federal child tax credit include the first and second children of families living in Puerto Rico, not just the third as specified under current law. The report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands.

The House tax bill would extend the rum-cover over payments for five years, but the Senate bill would not.

The task force was divided on whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit.

The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. That section expired at the end of 2016. The House bill would extend Section 199 for Puerto Rico in 2017, but in both the House and Senate tax bills that credit is targeted for elimination.

Rivera stressed during an interview last week that these recommendations were made by members of Congress to their colleagues.

Rivera spoke at the Washington office of the Puerto Rico Federal Affairs Administration, located a few blocks from the White House, where he had an afternoon meeting with White House officials and the Department of Energy on an evolving plan to establish electric micro-grids.

The micro-grids would be based at the island’s more than 200 industrial parks and offer lower cost, reliable electricity at facilities that already offer low rents.
“We need to take advantage of existing assets and that’s one of them, said Rivera, noting that the occupancy rates at the industrial parks is 74% and the average manufacturing wage is 40% below that on the mainland.

The micro-grids could be available within 12 to 24 months as part of the island’s short- to medium-term recovery strategy.

The long-term strategy, Rivera said, depends on obtaining the $94 billion in federal disaster aid requested by his governor.

But tax reform is the most immediate issue and officials of the island are expecting an answer within days.

“For tax purposes, Puerto Rico is considered outside the U.S. tax code,” Rivera said. “In everything else, almost everything else, we are considered domestic.”

Senate Finance Committee Chairman Orrin Hatch, R-Utah, said during his committee’s debate on tax reform that Puerto Rico’s tax issues will be handled in separate legislation.

Hatch served on the bipartisan task force on Puerto Rico along with Sen. Bill Nelson, D-Fla., whose attempt to make the rum cover-over permanent was rebuffed by Hatch.

But the short-term impact of establishing the new corporate tax system would have a detrimental impact on Puerto Rico’s economy at a time when 20% to 40% of all businesses there are at risk of shutting down because of Hurricane Maria.

“We are struggling to keep our small and medium businesses,” said Rivera, who explained that their problems range from lack of electricity to loss of inventory, physical damage to their facilities, business interruption and lack of capital.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, has told reporters that he and other lawmakers are considering several options for Puerto Rico.

Brady has met with Resident Commissioner Jenniffer Gonzalez, the island’s sole representative in Congress, to discuss her request to consider making the entire island eligible to become an economic opportunity zone or empowerment zone.

The advantage of that approach is that the territory would not get special treatment because other areas of the country also would be eligible for consideration.

“In theory Congress could create a special investment zone anywhere in the U.S. if you create certain criteria, so we would not get special treatment,” Rivera said.

Another option, Rivera said, would be to treat Puerto Rico as part of the United States for federal tax purposes and eligible for the same treatment.

“We are asking for fair treatment,” Rivera said. “But the truth of the matter is that there has to be some sort of transition period or some transitional tools so Puerto Rico can move to a stronger position economically and fiscally to be considered 100% fully domestic for tax purposes.”

One of those options would be to reduce the 20% excise tax on goods from Puerto Rico to give it an advantage over foreign companies, Rivera said.

“It’s very hard to predict what Congress, at the end of the day is going to do,’’ he said. “It’s very hard to forecast.”

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