That proposal does not imply that the Legislature will finally give way to the creation of the so-called Incentive Code. (semisquare-x3)
That proposal does not imply that the Legislature will finally give way to the creation of the so-called Incentive Code. (GFR Media)

 The Legislature and La Fortaleza went back to the idea of cutting industrial incentives and tax credits to save money and cover a large part of the $ 209 million shortfall that the tax reform proposal currently involves.

That proposal does not imply that the Legislature will finally give way to the creation of the so-called Incentive Code, which has remained in a kind of legislative limbo since June and which, so far, does not have the votes to be approved.

The Code bill, developed mainly by the Department of Economic Development and Commerce (DDEC, Spanish acronym), in addition to order incentives in a single statute, imposed a series of performance metrics and provided for government investment in different industrial sectors to be limited.

However, the proposal now seeks that the tax reform to be approved imposes a limit on the amount of money that the government can annually invest to encourage an industrial sector, said Treasury Secretary Teresita Fuentes.

"I do not know if there is enough time to approve the Incentive Code. It´s quite possible that we will end up reviewing the caps of each incentive. We are analyzing all of them," said Fuentes.

However, private sector leaders look on cuts in tax incentives with suspicion.

Originally, the fiscal plan certified by the Oversight Board, based on the Incentive Code proposal, imposed cuts on investments in agriculture, the film industry, tourism, manufacturing, rum and hospitals, among other economic sectors.

The imposition of these cuts led the initiative to face the opposition of a large part of the local business sector.

Fuentes did not specify how much money is going to be cut through the caps that would be imposed on tax incentives. The matter would be decided when studying the economic effect of each possible change in the laws that promote several industrial activities, she said.

In addition, this would not be the only initiative to reach the level of revenues of recent years, as required by the Board. According to the official, they will adjust the rates in different taxes to ensure compliance with the neutrality of the reform in government revenues. In the past, Antonio "Tony" Soto, president of the House Finance Committee, said, for example, that relief on corporate income taxes would be less drastic than those initially proposed by Governor Ricardo Rosselló Nevares.

 "We are reviewing all the laws and we are in conversations with (the Department of) Economic Development and the Legislature. There are laws with high caps that do not necessarily have the highest 'return of investment'," Fuentes said.

Private sector suspicion

On one hand, the president of the Puerto Rico Chamber of Commerce, Kenneth Rivera Robles, stressed that just the rumor that tax incentives will be modified can stop or discourage investments in Puerto Rico.

"It can stop economic activity. Instability can have the effect of losing investment," said Rivera Robles.

The president of the Manufacturers Association, Rodrigo Masses, on the other hand, stressed that reducing corporate welfare programs in order to lower income taxes has a fundamental problem and is that production is discouraged and consumption is encouraged.

That is, with the reform, companies in areas such as manufacturing, where products that generate capital or wealth are created, would have fewer resources to operate and would be in a worse position in terms of competitiveness.

On the other hand, trade, which is where the money is spent, would be encouraged as taxes on income and consumption would be reduced.

"And production is what allows us to develop the wealth so that the island can consume ... I would be very sad that something like this would be approved at the expense of the productive sectors of Puerto Rico," said Masses.

 The industrial leader stressed that currently the production of the manufacturers on the island generates much more than the 30 percent of the net income of the General Fund.

Video lottery still not included

 In the contributory analysis made these last weeks, the elimination of the portion of the property tax that applies to inventories and those initiatives associated with the video lottery - as recently agreed at a meeting between the Executive branch and House and Senate leaders - is not included.

(The video lottery) is not being considered in numbers," Fuentes said.

This was one of the main House proposals to bring more funds to the Treasury. People close to the process, who preferred not to be identified, indicated to this newspaper that the lottery issue creates disagreements between La Fortaleza, the House and the Senate because the parties do not agree on the use that would be given to the money.

 Carlos "Johnny" Méndez, House president, wanted to use the funds to cover what municipalities would not receive by eliminating the tax on inventory. Senate president, Thomas Rivera Schatz, wanted to use the funds to finance the contribution of municipalities to the Government Health Plan, now called Vital, and the governor wanted the money to pay the Christmas bonus for public employees.

The House insists that the legalization of video lottery prizes should be included in the reform, said Soto. The elimination of the tax on inventories, meanwhile, would be worked on in a separate bill.

"We are working on several alternatives to address the issue in a separate bill," said Soto.

They maintain the essence

 In general terms, the basic guidelines of the reform would be maintained. Rosselló Nevares' original proposal reduced income tax rates for individuals and corporations, lowered Sales and Use tax (SUT) rates on prepared foods and business transactions, and established a work credit.

 If the tax reform were approved, the SUT on prepared foods would be 8.5 percent. The goal is to eventually lower it to 1.5 percent. In the meantime, the goal is to eliminate the SUT between businesses (B2B) within three years.

The reform, in theory, increases taxes for people who are self-employed and small businesses that do not have to submit financial statements with their returns.

This would be achieved by requiring evidence or certifications associated with the deductions that, usually, these taxpayers claimed in the returns.

If a taxpayer do not want or cannot justify his deductions, he could benefit from an alternate calculation of their tax burden based on the gross sales of his company.

In that scenario, the tax on income would become a kind of patent.

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