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Man With A Mission

Treasury Secretary Juan Flores Seeks Taxpayer Justice While Keeping The Central Government Coffers Full


March 8, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Stamping out tax evasion: Puerto Rico Treasury Secretary Juan Flores reasons that the more taxpayers he can recruit to shoulder the tax burden, the more fairly we can all shoulder the burden

Puerto Rico Treasury Secretary Juan Flores is a man with a mission: to achieve taxpayer justice. The lofty goal will require him first to conduct some nasty business: to eradicate tax evasion. High technology equipment, increased personnel and the sure-bet dissuader of going after those who don’t do their civic duty will be his weapons of choice.

The battle cry of this 46-year-old certified public accountant–who audited the Treasury Department under four different secretaries–is a pledge to eliminate the underground economy by curbing tax evasion.

Although estimates vary, tax evasion in Puerto Rico could be as much as $2.5 billion annually, with close to $1 billion of that owed by non-filers and another $1.5 billion owed by taxpayers who under-report their income. Ironically, both categories have more than their fair share of not just business-owners, but doctors, lawyers, real estate & insurance agents & brokers, accountants, engineers, and many other licensed professionals and otherwise law-abiding, upright citizens.

"Taxpayer justice means that everyone should contribute his or her fair share to the government," Flores said. "Each person should pay what is due, not a penny more, not a penny less. We will achieve justice when we expand the number of taxpayers because then the load will be spread more evenly among a larger base."

While skeptics will point out that other secretaries have caressed the same lofty dream only to wake up from the nightmare of failure, Flores has designed a three-pronged approach to close in on those who think they can get away with tax evasion.

First, he will go after those who file income tax returns but don’t pay their due. The department’s books show that in this category alone, the past due taxes total $2 billion. According to the Treasury Department, more than 90% of that is owed by corporations. "It is possible that what is actually owed may be less because sometimes these companies come in and demonstrate that they have paid their taxes and that for some reason the debt was not erased from our books. Nevertheless, a large part of the debt is more than five years old."

In collaboration with Gov. Sila Maria Calderon’s transition committee, Flores’ predecessor, Xenia Velez, mailed 8,523 letters in December to collect $748.1 million in past due taxes. The bulk of the letters were sent to corporations. For example, 5,789 companies were required to pay $663.1 million in corporate income taxes dating back to 1995 through 1997. Additionally, 972 companies were asked to pay $76 million in back excise taxes spanning several years and another 1,122 companies received letters worth $8.2 million in claims for employer withholding taxes.

On the other hand, 640 letters went to individuals. Of these, 116 owed $549,859.98 in income taxes for 1997 and 1998, while another 524 individuals owed Treasury $289,937.12 for income taxes over a period of years.

The Velez letter, sent mid-December, close to the Christmas holidays, was the first salvo fired by Treasury in its most recent effort to collect back taxes and has led many companies to send in representatives or contact the Department to make appointments. "All things considered–the government transition, my appointment on Dec. 28, and the fact that many of the big debtors needed to see the Assistant Secretary of Internal Revenue, Ismael Vincenty Medina, whom I appointed Feb. 1--we are having a good response, " said Flores. He added that because companies know Treasury can embargo their properties they normally respond quickly. If the debtor disagrees with the department’s decision, they have different appeal mechanisms, including going to court.

Secondly, Flores will go after the other large group of tax evaders comprised of those who never file their tax returns. Although there are thousands of individuals in this category, Treasury is first going after the bigger cases, or those with potentially larger debts. "We must force the underground economy to surface and pay its dues."

Partly for this reason, Flores is vehemently against tax amnesty. "This promotes tax evasion because people do not comply with their tax filing obligation hoping for tax amnesty so they can pay less. Why penalize responsible citizens and reward those who have not obeyed the law?"

Flores’ third prong is to improve excise tax collection efficiency and security at the ports. He will increase container spot-checking from the current 2% to 10%. He will also increase the number of inspectors not through new hires but by relocating and retraining personnel from other departments. Treasury has 4,037 employees, many of whom Flores thinks are underutilized. Treasury’s $108 million annual payroll represents 70% of the department’s total budget of $156 million.

However, the key to ensure efficient and quick spot-checking will be a $20 million investment in five machines to be operational by years’ end. Flores said the machines examine each container in less than five minutes without having to open the van doors or take the container off the truck.

"They work like an X-ray machine, taking stock of everything inside the container. The Treasury inspector compares the bill of lading, which has a description of what is being shipped. If what he sees does not measure up, the inspector will then ask that the van be opened and he will go directly to the suspicious area. Practically everything you can think of, from drugs, to weapons, to cars has been found hidden behind legitimate listed cargo."

The machines are built when ordered. In the meantime, Treasury shares an existing one with federal U.S. Customs Service inspectors. More than 90% of Puerto Rico-bound container cargo comes from the U.S. mainland and is, therefore, domestic cargo examined by Treasury inspectors only. By value, 60% of the total cargo that entered the island in 2000 was domestic, under the jurisdiction of local Treasury inspectors, and 40%, was of foreign origin, inspected by both U.S. Customs and local Treasury inspectors. Flores praised the good working relationship established from the onset with the federal officials, who must interact closely with local Treasury’s inspectors.

After Flores met with U.S. Customs officials and they showed him the machine, he ordered the equipment immediately. These machines are being used at all major ports, including Singapore, the second largest container port in the world and one with the lowest tax evasion, he said.

Flores said the machines have the dual role of accelerating checking procedures and acting as a deterrent. "If people know they are going to get caught and if they understand that what they will pay by declaring the merchandise up front is reasonable, most will pay their taxes and not take the risk."

Flores also favors preparing a list of those business owners who have a spotless inspection record because the merchandise listed always matches what appears in the van. "Why should we waste time with people with a clean record, when we should be concentrating on those where we have our doubts?"

Another top priority for Flores, which is also tied to his main goal of achieving taxpayer justice, is finding an expert in central government information technology (IT) systems to assess the department’s systems. During the last three years, $150 million was invested in three different IT systems but they are not totally integrated and are not working at full capacity, he said. Consequently, Treasury’s statistics have fallen behind schedule.

"Each day, I try to get information and it comes back incomplete. The most recent government statistics are seven months behind. For the central government’s financial statements, I have data as of Dec. 31, 2000, which is reasonable. If I am to advise the governor and the Legislature, I need reliable, updated statistics." He estimates that it will take the government and the new team of experts two years to get the three systems working at top capacity. One of the three IT systems is precisely for keeping a close tab on income tax filings.

In his efforts to reach his goal, Flores goes a step further saying he wants to analyze Puerto Rico’s Internal Revenue Code to see how he can guarantee taxpayer justice, not only through an administrative process but also through legislation to amend the Internal Revenue Code.

Flores shares Gov. Calderon’s interest in lowering taxes. She has already announced that capital gains taxes will be lowered from the current 20% to 10%. The project is under evaluation to see if it is feasible and if it can be made retroactive to Jan.1, 2001, in which case it would be applicable for the 2001 tax year.

"With the lowering of the capital gains tax, no doubt people will be stimulated to sell properties. It could also be an important tool to attract the estimated $900 million in capital that Puerto Ricans have invested off-island." Most of this money is invested in securities and debt instruments in the stateside capital markets. What the Calderon administration wants, Flores said, is to attract this money back to the island to spur a venture capital market which, among other things, could help finance local management buyouts of non-locally owned manufacturing plants threatening to shut-down operations.

Another of Calderon’s promises is to create a special deduction for people whose adjusted gross income is less than $10,000. According to 1998 figures, which are the latest available, there are 220,000 persons in this group who filed returns that year.

"Historically, whenever taxes are lowered more revenue is collected by Treasury. Again, the risk of being caught acts as a deterrent and we stimulate people to file their tax returns, pay a smaller amount, and be on the safe side." This year’s goal is to have 900,000 tax returns filed on April 17 expected to bring in a total $2.6 billion.

Flores acknowledged that because most large government infrastructure projects are either finished or close to completion–which will slowdown economic activity somewhat–and several large manufacturing plants have announced they will shut down operations, next year’s filings may result in lower revenue for Treasury. Revenue from tax year 2000, however, should not be affected by either situation.

Flores is cautious when asked about the possibility of using the local tax code to help stem Puerto Rico’s rampant consumerism and at the same time spur the island’s pitiful savings rate by taxing consumption to some degree, instead of the present system that taxes primarily income.

"The issue has been discussed for years," Flores said. "It shouldn’t be a political issue but it always ends up becoming one. Studies have been done on this. I don’t close my mind to anything and it is my responsibility to evaluate everything, read existent studies and make recommendations. I will begin by reading all reports on the subject."

The Secretary of the Treasury is a firm believer in seeking the private sector’s input. Flores recently had a brainstorming session with tax experts, including some former Treasury deputy secretaries, lawyers and accountants. The discussion centered on recommendations that he was to submit to the governor concerning tax measures and other incentives to attract more industries and commerce to the island, as well as to stimulate local investment.

"My recommendations will be added to those of Government Development Bank President Juan Agosto Alicea and Economic Development and Commerce Secretary Ramon Cantero Frau, among others. Our main goal is to create jobs. That is the mandate we have from the governor."

Flores is very aware that tax incentives usually mean less revenue for the Treasury. "We are all very clear that all tax incentives we may consider for economic development must be revenue-neutral. The end-result must be that government finances not be affected."

Flores also feels strongly about instilling in government agency heads the need to meet their budgets because the government cannot continue to finance public debt. He will try to educate agency heads to make proper budget requests and to spend according to their allocations.

Flores said the ballooning public debt the Calderon administration has found is the result of a different philosophy.

"Agency heads were given a mandate to offer services. The responsibility of finding the money and maintaining a balanced budget, as the Commonwealth Constitution mandates, was for someone else to worry about. Our mentality is that government agency heads must offer good service and be budget conscious at all times."

The best examples of the lack of budget consciousness, he said, are the Department of Health and the health reform. "Health offered services, mainly the government sponsored health insurance card, for which there was no budget. This is not different from keeping the family budget. While I may want to give in to my son’s wish to study college in the States, I must first make sure that I can afford to."

Flores has already met with all the heads of his umbrella agency, which includes the insurance and banking commissioners. Like all the other umbrella agency secretaries, he is slated to give the governor his recommendation on his umbrella. Because he is still in the evaluation process, he has not decided whether he will favor the umbrella concept initiated by former Gov. Pedro Rossello.

He is sure of one thing: merging the roles of the insurance commissioner and the commissioner of financial institutions will be very difficult due to the practical difficulty of finding one individual who is an expert in both fields. Given the federal mandate allowing for the crossover of both professions, the possibility of having one commissioner with dual regulatory duties over both the insurance and banking industries has been discussed in the private sector.

"I was part of the recruiting committee for the job of insurance commissioner and even among industry leaders there are mixed feelings. In general, there is a misconception that the banking industry, because of its financial strength, will eventually swallow the insurance sector, but this need not be so." He added that younger members of the insurance industry view the new dual business scenario as an opportunity. Flores said elder scions in the field are reluctant about getting into banking, and tend to be suspicious of banks entering the insurance field.

Flores confesses that one of the things that made him join public service was to contribute so people could once again have faith in public servants. "For some time now, many persons have questioned why they should pay taxes when it will be stolen by those in government. The Secretary of the Treasury is the custodian of public funds and I am accountable to the governor and the people for the money. Citizens paid their taxes and they must be sure that the money is used to benefit the people. If I am able to restore people’s faith, then I will have been successful as Treasury Secretary."

This Caribbean Business article appears courtesy of Casiano Communications.
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