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Financial Times

Puerto Rico To Maintain Tax Break Pressure

By Canute James

May 22, 2002
Copyright © 2002 Financial Times. All rights reserved.

Puerto Rico will continue to press Washington for tax incentives to investors - likely to cost $32bn - despite indications US legislators will not consider the package for several months.

Officials in the US possession in the northeastern Caribbean said the administration was not discouraged by the setback, believing the incentives were important to the island's economy.

The government, which hoped the US Congress would consider the proposals by the summer, has been told they will not be debated until next year.

Sila Calderon, Puerto Rico's governor, said: "We know approval is an uphill climb, difficult and complex. But we remain optimistic."

Puerto Rico has proposed amendments to section 956 of the US internal revenue code, which Mrs Calderon's administration considers necessary to shore up the manufacturing sector that accounts for 40 per cent of the economy. The government of the territory of 3.9m people wants US companies with subsidiaries on the island to be allowed to repatriate free of tax 90 per cent of their profits from their Puerto Rican operations to the parent company.

The federal government would apply a 35 per cent tax to the remaining 10 per cent, creating an effective tax rate of 3.5 per cent on the subsidiary's profits.

This is regarded by the government as a necessary replacement for incentives that are being phased out and which had been central in transforming Puerto Rico's economy over the past 50 years from one based on struggling agriculture to rapidly expanding manufacturing.

The search for new ways of attracting investors coincides with a 50 per cent decline in the rate of expansion of the economy last year against previous years and government efforts to bridge a $500m deficit in this year's budget.

Concerns over the cost to the US of amendments to section 956 have led the island's government to consider removing benefits for intangibles such as patents, which benefited investors under earlier incentives.

Eliminating the intangibles would move the cost to the US Treasury of the amendment over 10 years from $32.3bn to $11.3bn, according to a congressional tax committee.

A senior government official said: "This is a significant difference that could determine whether or not the Puerto Rican proposals are accepted by the US Congress.

"Some companies said they wanted the intangibles included, but, if they are getting in the way of approval, they will be removed."

Jose Villamil, president of the Puerto Rico Chamber of Commerce, said removal of the provision would significantly dilute the effectiveness of the proposals.

The transfer of manufacturing intangibles was what made section 936 attractive. "Doing away with this would improve the chances of success in Congress but would limit the attractiveness of the concessions."

Despite the setback in Washington, Mrs Calderon sees reasons for hope. "What is most important is that ... there are many congressmen who endorse it."

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