The government of Puerto Rico and foreign corporations are called upon to open dialogue and seek sustainable solutions to these corporations' current fiscal relationships on the island and the mainland.
The U.S. Department of the Treasury indicated the need for Puerto Rico to come up with alternatives to the tax credit granted by the federal government to foreign corporations operating in Puerto Rico. The 4 percent tax credit means about $ 2 billion annually for the local Treasury, equivalent to more than 20 percent of the General Fund's net income. This is a substantial portion of Puerto Rico’s tight public coffers.
Washington needs to be aware that the credit is linked to the island’s fiscal capacity, and that eliminating it without a reasonable transition would exacerbate local fiscal and economic instability. Any decision must be fairly implemented so that the corporate sector remains on the island generating skilled jobs and competitive salaries. It is estimated that these companies generate around 12,000 jobs on the island.
The U.S. Internal Revenue Service has declared its 4 percent tax credit temporary. The 2017 federal tax reform takes that position. The U.S. government urged the island to transition to other sources of income. To compensate for these contributions, it was proposed for Puerto Rico to choose a tax on the Controlled Foreign Corporations' income that allows these companies to deduct up to 80 percent. It has also been proposed to renegotiate the tax decrees agreed with the companies. In any event, it is important to address the competitiveness of the incentives in this sector of the economy, while looking for other sources of revenue for the island.
About thirty companies pay the tax, a third of which contributes 80 percent of the tax revenues. They are taxed on profits and royalties for which they also receive federal credits.
The Puerto Rican government indicated that it will not take action or seek to amend Law 154-2010 until it has a final determination from the U.S. Internal Revenue Service regarding the credit. However, the government is making efforts to make the federal government aware of the economic contribution of these corporations to the island. It also maintains constant communication with the companies.
In addition to strengthening both actions, there is an urgent need to find fiscal and economic development solutions to improve the Puerto Rican fiscal condition. In the search to expand the sources of income to the treasury, a thorough reform of the fiscal system is still on the agenda, together with mechanisms to ensure an efficient collection of revenues, and with other equally necessary government reforms.
In his visits, Treasury Secretary Steven Mnuchin has shown clear optimism about Puerto Rico’s potential for development and recovery. He stated that the island can write a success story with its process of overcoming the long fiscal crisis, accentuated by economic stagnation and devastation left by Hurricane María two years ago. He has also strongly recommended correcting the structural problems that led to bankruptcy.
The dialogue between the government and business sectors with the U.S. government allows the island to change its economic objectives as part of its fiscal strengthening goals. With will and unity, the government and the different economic sectors can prove that Puerto Rico has the capacity and merit to rebuild itself from solid and sustainable government and development structures. Such willingness also entails strict compliance with better public funds management.