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

Treasury Secretary Teresita Fuentes said that, as anticipated, the tax reform – along with the legalization of slot machines - will come into effect on Tuesday, January 1, 2019, despite the fact that the Oversight Board warned the government that they did not fully comply with providing the estimate of the fiscal impact of the new law.

The fiscal entity, created through PROMESA, sent letters to governor Rosselló Nevares and Senate President Thomas Rivera Schatz and House Speaker Carlos J. Méndez Núñez indicating that they failed to provide the formal estimate of the fiscal impact that the legalization of slot machines will have. 

Since that the government failed to deliver the formal estimate of the fiscal impact of the law - as required by PROMESA - the Board warned that it reserves the right to take any necessary action, including preventing the application or enforcement of Articles 132 through 163 of the New Tax Law, which are those related to slot machines. 

The Board also noted that the Puerto Rico Tourism Company and the Treasury Department have not issued the Required Regulations for slot machines that operate outside of casinos. 

The Board requested to be provided with the missing “estimate within seven (7) days of the date on which the Required Regulations are promulgated.”

"For all purposes, I have the responsibility to implement the tax reform and the law will come into force, including that related to slot machines" indicated the head of the Treasury about the letter from the Board.

However, Christian Sobrino,  representative of the government before the Board, , tried to dispel doubts and assured that they will provide the data that the Board needs, while reaffirming that the tax reform continues as planned, since, he asures, it complies with the fiscal plan.

"That would be novel, it would be the first time that part of an approved law is excluded," Fuentes said.

For Kenneth Rivera, public accountant and president of the Puerto Rico Chamber of Commerce (CCPR, Spanish acronym), the Board´s letter raises doubts about the enforcement of the tax reform. "Just few days before the start of the new year, it does not seem nice for the Board to stop the enforcement of the reform. This creates a lot of uncertainty; There are businesses making changes in their internal programming to comply with the new law," he said.

"The first thing that needs to be clarified is whether the Board can stop the implementation of the reform. It surprises me that it can change parts of a law, when that is something that neither the governor nor the President can do," said Rivera about the possibility that the Board may decide to prevent the application of slot machines regulations.

An optimistic picture

However, Christina Sobrino, representative of the government before the Board, tried to dispel doubts and assured that they will provide the data that the Board needs, while reaffirming that the tax reform continues as planned, since, he asures, it complies with the fiscal plan .

He explained that Law 257-2018 - that amended the Puerto Rico Internal Revenue Code - requires that the Tourism Company issue regulations for slot machines and has 60 days to approve it.

Raúl Maldonado, Chief of Staff and former Treasury secretary, said that what the Board states in the letter is important and noted that the Tourism Company has been working on the regulation, but did not say when it will be ready. "They are strategies advanced to develop that regulation, but so far there is no draft," said Maldonado, implying that it will take time to draft the document.

Meanwhile, the Treasury will have to regulate the contributions on slot machines prizes.

To questions regarding whether the Board could stop slot machines or the application of the tax reform until they submit the regulations, Sobrino said it is not a possibility. "The letter clearly expresses that they accept the tax reform and that it is in compliance with the fiscal plan. What is missing is the regulation (of video lottery terminals) and they will be submitted."

He argued that the estimate delivered to the Board is that the Tourism Company will certify 25,000 machines and that there will be an annual revenue of $ 40 million for licenses. In addition, he said that they presented several scenarios with different collections estimates, which could be over $ 100 million per year. "The net impact of the machines could not be certified until the regulations are ready. We even presented the case of Illinois that implemented something similar in 2009," explained Sobrino.

About the regulation that the Tourism Company is drafting, Fuentes said that it will be stipulated that representatives of the Internal Revenue Service will confiscate the machines, together with the Police, when they are in violation of law. She noted she has not seen the document drafted by Tourism so far.

No surprises

On the other hand, members of the business sector were not surprised about the warning from the Board, made only days before the start of 2019.

"What they said does not surprise me because the members of the Board had already expressed their concern. They understand that those who now play in casinos will no longer do so and will go to bakeries and businesses near their homes where these machines would be legally placed," said head of the CCPR.

Manuel Reyes, Executive Vice President of the Chamber of Food Marketing, Industry and Distribution (MIDA,Spanish acronym), recalled that much of the private sector advocated for the bill to include the elimination of the Stored Inventory Tax. It was during these lobbying efforts, that someone brought the issue of the video lottery, but he said it was not them.

"The proposal of the video lottery appeared as an alternative to the elimination of the Inventory Tax. In the end, they left the tax as it was and we do not know where the numbers came from to approve the video lottery," Reyes said.

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