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Jeffrey Farrow -who was co-chairman of the White House Task Force on Puerto Rico and is now a consultant to statehood groups in Washington D.C.- the same tax reform law provides the island with a solution. (GFR Media)

Washington - With its recent letter to the leadership of the elected government of Puerto Rico, the Oversight Board has pressed for the continuity of the revenues generated from the tax on the sales of Controlled Foreign Corporation (CFC), which are about $ 1,800 million annually.

Natalie Jaresko, executive director of the Board, warned in her letter sent last week that, at a time when they seek to pass a tax reform on the island, the government has yet to adopt a "broader and more progressive" tax regime to replace the 4 percent tax established by Act 154- 2010.

The 4 percent tax, which generates little more than a fifth of the revenues of the Puerto Rican treasury, is tied to a federal tax credit whose continuity is not in the picture.

However, according to Jeffrey Farrow -who was co-chairman of the White House Task Force on Puerto Rico and is now a consultant to statehood groups in Washington D.C.- the same tax reform law provides the island with a solution.

Farrow indicated that the best alternative for Puerto Rico would be to transform -as other experts have pointed out- the 4 percent tax into a tax on corporate income, which could be deducted at federal level by 80 percent.

Under the federal reform, the income derived from the development of patents and trademarks that are transferred from a company in the US to a subsidiary abroad, such as the CFCs in Puerto Rico, will have to pay about 10.5 percent in contributions. But the law enables CFCs to deduct 80 percent of the taxes they pay outside the US, including the island.

Since CFCs report that about $ 35 billion of their $ 43 billion income on the island is generated through their intangible products - such as patents and trademarks - they could end up sending the federal treasury about $ 3,675 billion with the new tax, known as Gilti.

But, if the government of Puerto Rico changes the 4 percent tax for a tax on their income, they could deduct up to 80 percent of those $ 3,675 billion. That would give space for the government of Puerto Rico to increase its revenues.

Even Puerto Rico Senate president, Thomas Rivera Schatz, said that it is a matter that the government should reexamine as part of the local tax reform that they hope to approve in mid-November, at the latest.

The Board’s fiscal plan already made that warning.

Both the president of the Manufacturers Association, Rodrigo Masses, and economist José Joaquín Villamil have agreed that converting the 4 percent tax into a tax on the income of CFCs is a matter that must be considered. For Masses, the important thing is to wait in order to reach a consensus with the industry.

"The logical thing is that Puerto Rico replaces the Act 154 tax for a tax on profits," said Farrow, who was also executive director of the House Committee on Insular Affairs.

In that sense, Farrow insisted that it is unrealistic to think that Congress will give way to the request of the government of Puerto Rico and the private sector to grant the island a lower Gilti tax rate.

"It would make the territory a first-class tax haven," being the only place in the world with a lower tax rate for CFCs, Farrow said.

He also warned that this would discourage the possibility of achieving a change in the territorial status of the island.


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