In an attempt to attract more investment and create new jobs, the Puerto Rico Department of Economic Development and Commerce (DDEC, Spanish acronym), along with the Treasury Department, has developed a new code of tax incentives that will expand the type of companies and individuals that may receive these benefits, while implementing –for the first time- a specific mechanism to measure the effectiveness of incentives and preferential treatments granted.
Despite this novel effort, the new incentive code would bring savings for $ 300 million, a small figure compared to the $ 7,3 billion that the Treasury will stop receiving for these special treatments.
In short, Government and municipalities will no longer receive revenues for an amount similar to the General Fund.
Yesterday, at a press conference, the Secretary of Economic Development and Commerce and the Secretary of the Treasury, Manuel Laboy and Raúl Maldonado, respectively, assured that the new Incentive Code -now in the hands of the Legislature- has no precedent in the history of Puerto Rico. Both officials were confident that it will help transform the Puerto Rican economy, encourage local entrepreneurs and innovative projects, while making the use of public resources devoted to the island´s business development more efficient.
"We have never seen a tax reform and an incentive code like this one, which reflects the teamwork that has been done," said Laboy.
"Through this method, everything the Government invests will have a measurable performance, everything will be measured," added the official.
The missing piece
In filing the Incentive Code, the administration of Ricardo Rosselló Nevares completes the schedule of structural changes raised in the fiscal plan certified by the Oversight Board.
And once the proposed legislation is published, Puerto Rico will access the piece of the puzzle that would partially help to finance the tax reform, which, according to Maldonado, will leave about $ 850 million in the consumers´pockets.
Based on the officials presentation and the 470-page long bill filed this week, the Incentive Code marks a change in the way that the Government has allocated money for business and investment activities on the island.
That change will be both for the manner and for the activities that will be eligible to receive Government incentive, and also in the process that will be followed to grant these special treatments to companies and individuals.
First of all, the Incentive Code supposes the consolidation of more thab ten laws that grant special treatments to companies and certain individuals in Puerto Rico.
Laboy said that they did not transfer existing laws into a new legislative text. Instead, the integration of laws was the result of some 30 work sessions withmultiple organizations of the private sector, the official explained.
Meanwhile, Maldonado assured that what has been done meets the best practices for the management of benefits and investment initiatives.
By integrating the laws into a single code, the DDEC and the Treasury grouped the incentives that will be granted in eight areas. In addition, incentives were extended for individual local investors or those relocated on the island.
If the legislation is approved, the Government will grant incentives for exporting goods and services, and will give special treatment to finance, insurance and investment businesses and tourism initiatives through the "visitor economy” concept. There will also be benefits for creative industries, manufacturing, infrastructure, agriculture and entrepreneurship.
Fixed rate and permits
Laboy explained that now, instead of having particular rates for each sector, exempt businesses will sign a 15-year decree, which can be extended by another 15, and if they receive the DDEC authorization, it will have a 4 percent fixed tax rate, they will not pay 90 percent of personal property taxes and will not pay up to 60 percent the municipal permit. Those with capital gains and dividends will not pay taxes for such income.
"Bona fide farmers will remain exempted," said Laboy.
He added that there will also be special incentives for those who invest on the islands of Vieques and Culebra, and that SMEs with incomes under $ 3 million will be able to apply for incentives previously intended for multinationals.
In addition, instead of the company or individual claiming certain credits in their income tax return, the Government will grant a subsidy for investing in tourism, the film industry, research and development projects, as well as products manufactured in Puerto Rico, among others.
This investment will be paid through a new Economic Incentives Fund (FIE, Spanish acronym) where all current special incentive funds will be consolidated. The fund, explained Laboy, will receive 10 percent of the contributions paid by exempted businesses (which emulates the current structure of the industrial sector) or the amount approved by the Legislature in the budget process.
DDEC and Treasury bet on FIE to be a simple and centralized mechanism to manage public resources that were previously distributed among multiple agencies. In that sense, the Government partially complies with the Board's demand to reduce the multiplicity of funds for all types of laws that the Government has.
According to Laboy, Puerto Rico must make a decision between "stimulating competitiveness or subsidizing inefficiency" and therefore, incentives will be granted based on the return of investment to the treasury and the economy.
If the Assembly passed this legislation, every dollar approved by the DDEC will have to pass a cost-benefit test that will consider multiple variables. For example, jobs that will be created, if exports will increased and potential collections to the Treasury will be examined, among others.
All special treatments granted will be published in an annual report, assured Laboy.
"There is nothing improvised here. We need an incentive code that allows sustainable development," said Maldonado.
According to Maldonado, although Hurricane Maria made "a detour" to the incentive code, the new formula seeks to empower local entrepreneurs and motivate companies to invest in new equipment and machinery in order to develop more competitive businesses.
"All the economies that have grown and come out of the crisis have focused their incentives on local businesses," said Maldonado, apparently addressing years of criticism associated to the incentive model of the island.
A drop of water
According to Laboy and Maldonado, the Incentive Code would save about $ 300 million to the Treasury.
Although it would be the first time that a Government administration seeks to reduce and account for what it grants in preferential agreements, savings would be small compared to what the Government stops receiving due to its incentive model and preferential rate.
The DDEC and the Treasury revealed yesterday that in addition to the $ 610 million that current incentives and subsidies cost, the General Fund will stop receiving another $ 5,797 billion in collections, when analyzing the 4 percent fixed rate established for export activities and that of 27 percent for local activities. As a result the General Fund stops receiving about $ 6,406 billion each year.
This impact increases in $ 882 million when the money that the municipalities fail to enter due to tax exemptions to the Municipal Revenues Collection Center (CRIM, Spanish acronym) or the payment of permits, raising the public investment in business activities to approximately $ 7,288 billion. .
This way, although no figures were provided on the future impact of the Incentive Code on the economic activity, it seems that the agreement recently reached between the Government and the Board on the fiscal plan -and that would bring about $ 250 million to municipalities- would hardly compensate the impact that these receive in incentives and preferential treatment.
On the other hand, while the fiscal impact of promoting business and investment activities on the island is equivalent to 10 percent of the gross product, data from the Planning Board suggests that between fiscal years 2008 and 2017, compensation to employees has decreased by 7 percent.
However, according to the fiscal plan certified by the Board, it is still urgent to reduce the costs of doing business in Puerto Rico, which Laboy reiterated yesterday.
According to the plan of the Board, a labor reform that eliminates protections for unjust dismissal will lead to partly meet that objective. That bill was partially approved yesterday in the Senate.
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