U.S. Treasury Secretary Steve Mnuchin. (GFR Media)

Washington - The possibility of eliminating the federal tax credit established by Act 154-2010 would mean ending with a concept that experts considered unconstitutional and might be in line with the intention of the federal tax reform to reduce incentives for foreign companies.

A new tax – starting at 10.5 percent – was imposed on the intangible assets or intellectual property of Controlled Foreign Corporations (CFCs) under the 2017 tax reform.

“The exception made to Puerto Rico, with the law 154 tax credit does not make sense within the public policy of the reform, because it encourages companies to move revenues to Puerto Rico to avoid taxes elsewhere,” said Jeffrey Farrow, who co-chaired the Bill Clinton´s Task Force on Puerto Rico and has advised statehood groups.

The domestic corporate rate is at 21 percent with the federal reform. But, at the same time, the federal credit was reduced from 100 to 80 percent for CFC revenues from products manufactured in the states.

This week, U.S. Treasury Secretary Steve Mnuchin asked Governor Wanda Vázquez Garced and her team to present a transition plan to eliminate the temporary credit that has allowed foreign companies to fully deduct the 4 percent tax imposed by Act 154, which represents about $ 1.8 billion annually or about 22 percent of the Puerto Rican government’s General Fund revenues.

Fiscal Agency and Financial Advisory Authority Executive Director (FAFAA) Omar Marrero said the issue has been under discussion with a federal and Puerto Rican working group, and that Mnuchin's request does not have a fixed deadline.

According to sources, during the Ricardo Rosselló Nevares’ administration – who extended the Act 154 tax credit for a decade when he took office– advocated for the Treasury to grant a several-year period to develop a mechanism to replace those revenues.

When Puerto Rico’s government was about to make the most recent adjustments to its fiscal system, Senate President Thomas Rivera Schatz said that one of the alternatives to be examined was the change of Act 154 sales tax to an income tax, 80 percent of which could be deducted through the new 10.5 percent tax on foreign companies intellectual property by the 2017 federal reform.

A new tax on corporate income would require a review of the tax decrees they have in the government.

Rodrigo Masses, president of the Private Alliance for Economic Growth of Puerto Rico, finds it illogical to press the government to find an alternative to that federal credit, since Vázquez Garced has only been in office for just over a month and the island still has to deal with a fiscal and public debt crisis that has led to the imposition of an Oversight Board.

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