Steven Mnuchin at the center. (GFR Media) (horizontal-x3)
Steven Mnuchin at the center. (GFR Media)

Washington - In the face of the tax reform that the Puerto Rican government is driving, the administration of Ricardo Rossello Nevares seeks to be certain about the future of the federal credit that foreign companies receive by the 4 percent excise tax imposed on their sales in the United States.

That tax, according to the certified fiscal plan, may have left $ 1,9 billion - about 22 percent of the budget - to the Puerto Rican Treasury during the last fiscal year.

Local authorities have been knocking on the door of the Trump´s Treasury Department for months.

Talks would have been stronger during the 2017 debate on the federal tax reform, but they continued periodically.

The Puerto Rican government would like to know the road it is taking before attempting to legislate this semester a possible tax reform this semester. Although the climate in Washington encourages some of the officials, they do not predict that there will be a decision soon.

Any change in the federal credit due to the local tax to Controlled Foreign Corporations (CFC) may have a significant effect on the budget revenues. The contributions paid by these companies are a crucial part when drafting the local tax reform that is still pending in the agenda of the Puerto Rican government.

When Treasury Secretary Steven Mnuchin met with Rossello Nevares and Puerto Rican officials on July 19, in San Juan, he said it was an issue "subject to ongoing discussions."

"The Internal Revenue Service (IRS) has indicated that the intention was that this (the recognition of the payment of the excise tax to Puerto Rico as a credit in the federal return) would be temporary. That has been happening for a while. We do not specifically discuss that," Mnuchin told El Nuevo Día then, in referring to the meeting he held with government officials in Puerto Rico on recovery works following the devastation caused by Hurricane Maria.

Officially, the government of Rossello Nevares says that there is nothing that should generate concern now. Mnuchin's expressions -a little more than a month ago- do not seem to reflect that there is a rush to make any determination.

"The atmosphere is incredibly positive. (The Treasury Department) is the best relationship that Ricardo Rossello has in the (Trump´s) administration "said Manuel Ortiz, the governor's chief lobbyist in Washington. 

When the island´s authorities found things are cold in the Treasury, it was in response to proposals from the government of Puerto Rico, not because there is interest of the federal government in resolving the matter, said another source close to Rossello´s government.

Ortiz stressed that any interpretation that the Treasury has the intention to stop crediting the tax is “outside of reality".

Jennifer Gonzalez, Resident Commissioner in Washington, only said that the future of the tax to Controlled Foreign Corporations "is one of the elements" that has been discussed in the federal capital "as part of the local tax reform".

The subject has been in the hands of the now Chief of Staff and  Puerto Rican government´s chief financial officer, Raul Maldonado who was the Treasury Secretary until July 31.

Doubts on the validity

Doubts on the constitutionality of the federal credit for the tax of Law 154 has been in debate since its approval in 2010.

In 2014, Martin Sullivan, who has been a professor at Rutgers University and an economist at the Treasury Department, published an article in which he questioned the constitutionality of the statute, on the grounds that it violates the interstate commerce clause.

For Sullivan, it is clear that corporations in the United States and not those in Puerto Rico are the ones that feel the effect of the tax. Sullivan has described the federal credit for this tax as the true financial bailout of the island from the Barack Obama administration. 

In his article published in Tax Analysts in 2014, Sullivan said that even if the constitutionality of the tax is established and other technical requirements are met for accreditation, accreditation is objectionable for reasons of public policy because the main beneficiary of the loan is the government of Puerto Rico and not multinationals”.

Last week, Sullivan told El Nuevo Día that, because of the temporary nature of the credit, he still thinks it is an issue that can be successfully challenged in Court.

After Trump's government ruled out preferential treatment for the island within the new tax system for US companies doing business abroad -the so-called Foreign Controlled Corporations -, the Puerto Rico Manufacturers Association would consider any decision directed not to credit the tax as a “infamy”.

But Rodrigo Masses, president of the Puerto Rico Manufacturers Association -that has hired lobbying services of former Republican Congressman Jerry Weller- said they have "no clue" that "someone in the Treasury is planning" any change in federal credit to the Law 154 tax that affects the island.

"If that happened, it would be an infamy. Anything that creates uncertainty for Puerto Rico would be inconceivable," said Masses.

The Board that oversees Puerto Rico´s public finances -and that is in charge of the island´s fiscal plan and budget -, has not received any information of a decision either.

Right now, the Board is struggling for the government of Puerto Rico to disclose all contracts, whether in the form of tax incentives or similar decrees, which confer tax  forgiveness or relief to taxpayers, since July 1st. 

A few days ago, Senate president, Thomas Rivera Schatz, said in San Juan that the Controlled Foreign Corporations Control should "voluntarily" consider an increase in the tax, a proposal he has made since before Law 154 was passed.

The recent context of these expressions is unclear, as the president of the Senate did not answer to messages from this newspaper.

But the new tax of up to 13.1 percent – that some believe will actually be around 10.5 percent - on the intellectual property of foreign companies established by the federal tax reform law and that was questioned by the Puerto Rican government, might be a door for an increase to the contributions of these corporations on the island.

With the new federal tax reform law, foreign companies could deduct 80 percent of taxes imposed abroad on their profits, including Puerto Rico, according to an expert.

But, both government and manufacturing sources said that they are awaiting the regulation of the federal tax reform law, which could be published sometime in the fall.

Without reaching conclusions, Masses said that the total credit of the 4 percent tax on the sales of the island´s foreign companies in the United States might be more comprehensive than an 80 percent of credit for the profits of the Controlled Foreign Corporations on the island.

"From the point of view of what we do (in the Manufacturers Association), our tax committees are always evaluating alternatives that may be more convenient for economic development," said Masses.

The debate over the federal tax reform passed last December generated a big gap between Rossello Nevares, on one side, and Commissioner González, Rivera Schatz and House Speaker Carlos "Johnny" Méndez, on the other.

Rossello Nevares still asks, at least temporarily, a lower tax rate for the Puerto Rico´s Controlled Foreign Corporations since it is a federal jurisdiction.

Meanwhile, Jennifer Gonzalez and the island´s legislative leadership promoted in 2017, also without success, some language that would turn Puerto Rico into a domestic jurisdiction exclusively for tax purposes.

Under current regulations, a US company has the option of establishing on the island under the tax mechanism of Controlled Foreign Corporations or as a domestic corporation.

The federal credit for the 4 percent tax to foreign corporations would leave the Puerto Rican government $ 1,831 billion this fiscal year, according to Rossello´s fiscal plan. But it would be reduced to about $ 1,2 billion in 2023.

The reason for such a significant reduction in four years has not been detailed. 

According to the Puerto Rico Planning Board, the transfer of patents between foreign companies on the island and their parent companies in the United States makes a difference of $ 30 billion in the estimate of the real Gross Domestic Product of Puerto Rico.

On paper, the economy reached $ 104,2 billion in 2017, but when patents are excluded, the real number remains at $ 70,6 billion, according to the Planning Board.

Reporter Joanisabel González collaborated with this report.


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