WASHINGTON — Rep. Dave Camp's tax reform proposal would provide some additional revenue stability to beleaguered Puerto Rico, and has drawn support from the commonwealth's representative in Congress and others working to advance the territory's interests.
The plan by the chairman of the House Ways and Means Committee chair, released Feb. 26, would impose a higher tax rate on the subsidiaries of multinational manufacturers operating in Puerto Rico. Those manufacturers are currently considered under federal law to be "foreign corporations" whose income is not taxable. Under special multi-year agreements with the Puerto Rican government, some of these corporations pay corporate income tax rates far below the commonwealth's maximum rate of 39%, and instead pay a special excise tax, the legality of which has been questioned by some observers and even the Internal Revenue Service. The IRS is currently analyzing the excise tax, but has said if it finds it is illegal, the finding will apply prospectively.
"Dave Camp's proposal to comprehensively reform the federal tax system would lower the corporate income tax rate to 25% for income from the States and the District of Columbia," said a lobbyist familiar with Puerto Rico's position. "It would also lower the effective rate to 1.25% on income from outside of the sates and [District of Columbia] — U.S. possessions such as Puerto Rico in addition to foreign countries. It would additionally, however, require taxation of income from manufacturing products developed in the states or D.C. (intellectual property/intangible assets such as patents and trademarks) in foreign countries or U.S. possessions at the normal tax rate (25%) in the case of goods made for the U.S. market and 15% in the case of products sold abroad."
Those aspects draft would bring to an end the tax haven these large manufacturers have enjoyed, the lobbyist said.
"Many Puerto Rico products were developed in the states. Some four-fifths of what is made in the islands is sold in the states. So, most goods manufactured in Puerto Rico would have to be taxed at 25% of income by the federal or territorial governments."
But those companies would not have an incentive to flee Puerto Rico even under this tax plan, because they would not be able to find lower tax rates elsewhere.
Puerto Rico resident commissioner Pedro Pierluisi, the commonwealth's sole representative in Congress, has proposed that federal revenue from the new taxation of income from Puerto Rico be granted to the island's government, similar to the federal grants of taxes on rum made in the territory and foreign countries and customs duties collected in the islands.
Puerto Rico Gov. Garcia Padilla and some companies with subsidiaries in the territory lobbied for an exemption from the tax rates on intellectual property or for a lower rate for products made in U.S. territories, but Camp rejected the idea, as did then-Senate Finance Committee chairman Max Baucus, when they requested it be included in one of Baucus' tax reform proposals last year.
Pierluisi said the draft proposal would offer stability by creating a permanent rate not subject to periodic Congressional reapproval.
"This would be a positive change," Pierluisi said.
Section 199 of the Internal Revenue Code allows companies operating in the U.S. to receive a tax break, including Puerto Rican branches not organized as "foreign corporations" and already paying an extremely low rate. The application of that section to Puerto Rico expired Dec. 31 2013 and has not been reauthorized by Congress, which represents a blow to major employers on the island.
"In short, the Camp draft would reduce the federal tax on income that U.S. companies that operate in Puerto Rico in branch form derive from qualified manufacturing activities from about 32% to 25%, and make that rate permanent rather than subject to periodic reauthorization by Congress," Pierluisi said. Though nearly all observers believe Camp's plan is unlikely to advance on its own, many tax lobbyists and industry group leaders believe it could set the tone of tax reform conversation for the immediate future.
