The Oversight Board. (semisquare-x3)
The Oversight Board. (GFR Media)

The Board warned yesterday that any change to the Puerto Rico tax system should not affect the income and budget balance projections established in the fiscal plan certified a week ago.

After announcing that Governor Ricardo Rosselló Nevares and the legislative chambers reached an agreement that would give way to the tax reform, the Board indicated that, until yesterday, it had not received a “list of specific payfors that will be used to offset proposed decreases in tax revenue,” but anticipated that several of the initiatives disclosed would be contrary to the fiscal plan.

Yesterday, almost a year after changes to the tax system were proposed with no results to date, the Executive and Legislative branches assured that they will approve one of the main political promises of the governing party.

Among other things, the tax reform will offer a "tax credit rate" incentive of 5 percent to all individuals who file income tax returns.

In addition, the corporate rate will be reduced from 39 percent to 37.5 percent, the business to business (B2B) tax will be eliminated in the case of taxpayers with income of $ 200,000 or less, which would allegedly benefit about eight out of 10 businessmen.

The Sales and Use Tax (SUT) on prepared foods will also be reduced, regardless of the payment mechanism used.

These tax benefits were announced yesterday, after a meeting between Rosselló Nevares and the presidents of the legislative chambers, Thomas Rivera Schatz and Carlos "Johnny" Méndez.

Rosselló Nevares, who expects the measure to be approved this week, said that both the presidents, as well as some of the collaborators and the Treasury, among others, agree with this way of collecting taxes, with giving this contributory relief to the people, “but surely, if this tax reform is approved now, people are going to be receiving tax benefits fairly quickly”.

It was reported that the House Finance Commission will have an executive hearing today to discuss the tax reform bill 1544.

There will be a caucus at noon, and then the bill could go down to a vote in the session scheduled for 2:00 in the afternoon.

From La Fortaleza and at a press conference, the Secretary of Public Affairs Ramón Rosario Cortés assured that the tax reform will cost about $ 1.127 billion to the Treasury within five years of the fiscal plan, but it was not entirely clear how such relief would be paid.

"It will be payed for with the proposed changes to Treasury regulations - to have a better oversight - which were already identified in the fiscal plan originally approved by the Board – with revenues of $ 1.678 billion - along with buffer measures to soften behavior change that will have an impact of $ 405 million," Rosario Cortés said, stating that the reform would leave a surplus of nearly $ 170 million after five years.

During the press conference, Rosario Cortés seemed to counter any objection from the Board. This, by indicating that they were carried away by "modifications to the contributory system of certain individuals who were already evaluated in the first fiscal plan and approved by the Board".

What the fiscal plan says

However, the tax plan adopted by the governor and the Legislature seems to distance itself from the recipe certified by the Board.

If this were the case, it implies a risk of implementation in the recently approved fiscal plan and that according to the Board, it must be fully implemented. Otherwise, this would ruin the objective of fiscal balance established in PROMESA and the surplus projections to negotiate with bondholders.

According to the fiscal plan, after six fiscal years, the government must increase its revenues by $ 2.216 billion. Of that amount, about $ 1.202 billion must come from better tax control and another $ 1.013 billion, due to increases in rates and certain taxes.

"To ensure revenue neutrality, the implementation of any tax law initiatives must occur sequentially, with the Government ensuring that initiatives are paid for before rates are reduced," reads the certified fiscal plan in Section 14.3.2 (Principle of Revenue Neutrality).

 El Nuevo Día tried unsuccessfully to find out how, specifically, the government and the Legislature reached their numbers.

Nor was it possible to have a reaction from the presidents of the legislative commissions of Finance, Antonio Soto and Migdalia Padilla. It was reported that Soto is traveling. Padilla, meanwhile, claimed not to be aware of the agreement reached at La Fortaleza.

The alternate basic contribution

Later on Monday, the government seemed to have fine-tuned how it will pay for the tax changes.

In written statements, the Department of the Treasury explained that the money will come out of the adjustment in the alternate basic tax that applies to individuals; and the corporate alternative minimum.

The Alejandro García Padilla administration sought to strengthen its revenues by making adjustments to the alternate basic contribution, which gave way to initiatives such as the so-called National Patent. Such measures, in the long run, were without effect.

On this occasion, the Treasury strategy seeks to limit "certain deductions for those who cannot prove they have them".

 On the option of paying for the reform by setting caps to tax incentives (what was once the pillar to pay the tax reform), Rivera Schatz said that "the Incentive Code can be treated at the time because, with the protective measures that have been taken, and based on the numbers we have, there is no difficulty. "

 Meanwhile, Méndez stressed that "we have reached some agreements regarding the numbers," but said that "we want to be also in compliance with the fiscal plan established by the Board."

Popular representative Rafael "Tatito" Hernández requested that the legislative leaders and the governor "explain to the people where the funds to pay for this reform will come from; what is the empirical basis they used to guarantee revenues and if they are certain that they will comply with the certified fiscal plan".

 Reporters Leysa Caro and Keila López Alicea collaborated with this story.

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