Puerto Rico Gov. Ricardo Rossell- approved extending a tax that is providing 25% of the commonwealth's revenues and had been scheduled to sunset in calendar year 2018.
On Tuesday Rossell- signed the extension of the Act 154 tax on foreign corporations to December 2021 from this December.
From July through November of 2016 this tax accounted for 25% of all General Fund revenues. Bringing in $770 million, it was biggest revenue source, eclipsing the $713 million brought in by individual income taxes.
In 2010 Puerto Rico passed Act 154 as a way of dealing with its government financial crisis. The law was set to impose a continually declining levy rate on foreign corporations until it would be phased out in the current fiscal year. However, Puerto Rico finances continued to be stressed and the government generally maintained the excise tax at 4%.
In December 2011 the U.S. Treasury adopted regulations that allow corporations to take tax credits against temporary excise taxes like Act 154.
In March 2011 the U.S. Internal Revenue Service issued Notice 2011-29, which said the determination of the creditability of the excise taxes required that some legal and factual issues be resolved. The IRS hasn't yet reached a decision.
Rossell-'s action on Tuesday is step forward for the continuation of the tax for the next few years, but isn't adequate to assure that Puerto Rico will receive the revenue.
In its Dec. 18 "Financial Information and Operating Data Report" Puerto Rico's government stated, "The commonwealth will need to replace the revenue produced by the special temporary excise tax imposed by Act 154 if its effective period is not extended (it expires on December 31, 2017) or if the Internal Revenue Service eliminates its creditability against an entity's federal income tax liability."
The loss of this creditability could lead to corporations to remove their operations from Puerto Rico. Many of the "foreign corporations" affected by Act 154 are companies based in the U.S.
According to Puerto Rico, 10 corporations and partnerships paid 90% of all Act 154 taxes in fiscal year 2016. The law mainly affects corporations manufacturing pharmaceuticals and other high-tech products on the island.
