Washington - Puerto Rican government officials acknowledged yesterday that they have to respond to the Treasury Department's request to present a plan to discontinue the federal tax credit on foreign companies sales imposed by Law 154.
As part of the plan, they would have to look for another initiative to preserve revenues that represent more than one-fifth of the island's budget, about $1.8 billion annually.
“It´s in the fiscal plan and it has to be worked on,” said Omar Marrero, executive director of the Fiscal Agency & Financial Advisory Authority (FAFAA), upon leaving a meeting with Democratic Rep. José Serrano (New York) along with Governor Wanda Vázquez Garced and other officials).
Vázquez Garced said the future of the federal credit to Controlled Foreign Corporations (CFCs) was one of the issues discussed in Tuesday's meeting with Treasury Secretary Steve Mnuchin and senior advisors to the U.S. Treasury Department. "Any (pending) issue we have will be worked on in other meetings," Vázquez Garced said.
This is not the first time that Secretary Mnuchin brings the tax credit to foreign corporations to the table. In July 2018, Mnuchin said in San Juan that this issue is part of the discussions with the government of Puerto Rico and stressed that the objective of the credit approved in the Treasury to allow a 100 percent deduction of the tax imposed by the government of Puerto Rico is that it is temporary.
In addition to the fact that the Oversight Board ordered in its fiscal plan to look for an alternative to Law 154, both governments have a working group following up on these issues, Marrero said. The government of Ricardo Rosselló Nevares sought a grace period.
However, Mnuchin asked Tuesday to draw up a plan for the progressive elimination of the Law 154 credit, but he did not set a date for his request. "We have to see what the plan is and what priority is being given to this issue," said Resident Commissioner Jenniffer González, who was at the meeting.
However, while trying to tone down the discussion on an issue that raises concern among the manufacturing sector, Vázquez Garced said Tuesday's conversation was more focused on the Opportunity Zones program and other issues. "It was a 30,000-foot view," Marrero said, insisting that they don´t have a deadline to deliver the plan.
Experts indicated that the 2017 federal tax reform opened the door to replace the 154 tax with an increase in income taxes. If it were an income tax, the charge established by Law 154 would be 80 percent deductible under the "GILTI tax" of the federal tax reform, which imposed a new 10.5 percent tax on CFCs intellectual property.
Antonio Soto, chairman of the House Treasury Committee, who also participated in the meeting at the Treasury, said: "We all know it is an issue that we have to address." He warned, however, that "the process can't be like turning off a light switch."
When the government of Puerto Rico, under the Luis Fortuño administration, approved Law 154 in 2010, the plan was that the new 4 percent tax on sales by foreign companies to their U.S. parent companies would be implemented for six years and would be reduced over the years. But governor Alejandro García Padilla extended it for another four years, at the same 4 percent rate.
Just at the beginning of his term, Rosselló Nevares extended it for a decade.
When the tax was created, it was established that the tax collected considering the sales that manufacturing operations on the island make to their parents, it was identified as a kind of replacement for a tax on income.
The Fortuño administration's idea back then was that the tax would be charged initially until the Treasury developed the mechanisms to collect the tax, which, a decade later, has not happened.
Any adjustment will have to consider not to affect revenues in the General Fund. The 4 percent tax represents 20 percent of the revenues, but when considering the effect of industrial operations on the economy, this activity can represent up to 30 percent of the General Fund revenues, according to experts.
The fiscal plan includes changes to the 4 percent tax, which is why projections for this item show decreases, however, this projection partly considers a drop in sales due to the end of exclusive licenses for certain drugs produced on the island.
"This is an issue that should have been addressed years ago," said Senate Popular Democratic Party (PPD) spokesman Eduardo Bhatia.
Vázquez Garced had her first day of meetings in the U.S. House yesterday. She first went to the Resident Commissioner's office and then met with Serrano, Republican Rob Bishop (Utah), Puerto Rican Democrats Darren Soto (Florida) and Nydia Velázquez (New York), and Republican minority leader Kevin McCarthy (California).
Marrero; Puerto Rico's representative to the Oversight Board, Elí Díaz Atienza; Commissioner González; Housing Secretary Fernando Gil Enseñat; Health Secretary Rafael Rodríguez; and the director of the Central Office for Recovery, Reconstruction and Resilience (COR3), Ottmar Chávez, among others, participated in several of the meeting Vázquez Garced had.
Serrano said he wanted to made himself available to the governor.
Republican Bishop, who described Vázquez Garced as a "Republican governor," said she insisted that the key to improving Puerto Rico's economic future is a public policy of "collaboration and cooperation" with the Board.
Soto added they mainly discussed Medicaid and reconstruction funds.
Meanwhile, a spokesperson for Velázquez affirmed that "the Representative and the governor had an honest and productive conversation. During her meeting, the congresswoman stressed the need for the governor to restore transparency, responsibility, and trust in the government so that the island's people receive the help they need."
Joanisabel González collaborated with this story.