The Treasury Department has considered announcing this Christmas the end of the Law 154-2010 4 percent tax imposed on foreign corporations doing business in Puerto Rico and which represents nearly $2 billion annually.
“They were considering ending ( the tax credit) on January 1, 2021, and now they are thinking making it effective by January 1, 2020," said a source close to Puerto Rican affairs in Washington who spoke with Treasury Department officials. The Treasury has avoided to officially set a deadline to their claim for Puerto Rico to seek an alternative to the federal tax credit. Yesterday, the Treasury's press office confirmed they received a request for information from El Nuevo Día, but by press time, there was no answer.
However, according to the source, the Treasury will announce its decision on the Internal Revenue Service's (IRS) notification that "temporarily" established the credit for foreign corporations under the Puerto Rican law "any time between Thanksgiving and Christmas."
This source spoke with El Nuevo Día after Eduardo Bhatia, a Popular Democratic Party (PPD) candidate, said Sunday that he had heard from Congress members that the Treasury could make an announcement "in the next few days." Bhatia asked Governor Wanda Vázquez Garced to explain the negotiations with the Treasury.
The end of the federal credit, which was approved in early 2011, would force the government of Puerto Rico to review Law 154, perhaps having to opt for a tax on CFCs' income, which would allow U.S. subsidiaries to deduct up to 80 percent, and the renegotiation of the tax decrees signed with these companies.
The U.S. Treasury Secretary led by Steve Mnuchin, has reminded the Puerto Rican government several times this term that it is time to look for alternatives to the federal credit. For example, Mnuchin made that warning in an interview with El Nuevo Día in July 2018, aftera meeting with former governor Ricardo Rosselló.
Although there have been other conversations, U.S. Treasury Secretary Mnuchin brought up the issue of Law 154 during the meeting he had with Governor Vázquez Garced on September 10. Then, he said the U.S. Treasury wanted the Puerto Rican government to draw a plan seeking to endthe federal credit and that the idea was not having to deal with this issue "in six months."
Although the Treasury said they did not want to give an ultimatum, the federal government's will to seek a swift solution to this debate is clear.
If the IRS dropped the credit as of next January, it would imply that those corporations that pay the tax to Puerto Rico could claim the same for the purchases made from their affiliates on the island until December.
Since the IRS' interest in eliminating the credit is not new, taxpayers may have decided to increase their purchases from the island's affiliates in the last fiscal year anticipating a possible change in the game.
According to the Treasury Department, last fiscal year, 4 percent tax revenues last year reached its highest rates since 2010 when it hit some $2.083 billion. Collections total $168 million, or 8 percent more than revenues for the same item during fiscal year 2018. In the first three months of this fiscal year, revenues under Law 154 totalled $629 million or about $3 million more than between July and September of fiscal year 2018.
No official information
Yesterday, Treasury and Economic Development and Commerce (DDEC) secretaries, Francisco Parés Alicea and Manuel Laboy, respectively, assured El Nuevo Día that the Treasury has not notified them any determination related to Law 154 and anticipated that the government of Puerto Rico will not take concrete actions or file legislation to modify the statute until they have a final decision by the IRS.
However, Parés Alicea said the tax community in the United States, Puerto Rico and worldwide is expecting the U.S. Treasury to issue regulations as a result of the 2017 federal reform.
"We all know that the tax reform at the federal level brings changes in the tax system in the United States and that will force the Treasury to issue regulations regarding the tax paid in foreign jurisdictions," said Parés Alicea.
"Those Treasury determinations will be framed at a global level and in that sense, Puerto Rico - as a foreign jurisdiction - could be affected as it would happen to other foreign jurisdictions. It wouldn't necessarily be a ruling on Law 154," added the Treasury Secretary.
Faced with that reality, said Parés Alicea, the government of Puerto Rico has been working to inform Treasury and IRS officials about the -fiscal and economic- importance of the industrial activity on the island.
Laboy said the government is in conversation with companies that pay the 4 percent tax.
"Communication with these companies is constant, we have shared information as much as possible and we have participated in many conversations," Laboy said.
Laboy admitted that both leading local manufacturers subject to tax and corporate officials working on these issues are analyzing scenarios, variables and possible alternatives to a change in the IRS policy, but the measures to be finally adopted will depend on the Treasury determinations.
Meanwhile, Laboy indicated that companies with decrees frequently renegotiate the terms, but that to date has requested changes to their tax contract as a result of the possible end of the 4 percent tax credit.
The industrial sector is not participating in the possible negotiations between the Vázquez Garced administration and the U.S. Treasury, acknowledged yesterday the president of the Puerto Rico Manufacturers Association (PRMA), Carlos Rodríguez Colón.
Rodríguez Colón said there are ongoing conversations with companies that could be affected, but stressed that to date, the industrial sector does not participate in the analysis or design of any strategy seeking to bring relief to the situation.
Currently, according to the executive, there are three possible solutions to the situation: to change Law 154 so it becomes a tax on income, which would avoid the IRS having to express itself on the issue; increase the rate applicable to royalties and change current tax decrees.
Changing the decrees would be the most damaging scenario, Rodríguez Colón said. "If the company decides to modify its decree, that is valid, but if the government decides on its part to make changes to those contracts, that will affect the possibility of bringing new investment," explained Rodríguez Colón, who insisted that the government should discuss with that sector the changes that should be legislated.
Rodríguez Colón recalled that Puerto Rico was at a disadvantage once the U.S. government reduced the corporate tax two years ago. Now, eliminating the credit associated with the 4 percent tax would represent another setback for the island.
"Puerto Rico cannot eliminate the 4 percent credit and increase electricity rates without affecting competitiveness," Rodríguez Colón noted.
Vázquez Garced said Monday her government has "multiple alternatives," but did not want to reveal them to avoid affecting a possible favorable decision for the people of Puerto Rico.