Congress OK's Territory's Tax Cut For Investments Request . . . But Not The Territory Of Puerto Rico, New Trade Law Protects Island’s Tuna But Not As Much As Acevedo Said

August 9, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Congress OK's Territory's Tax Cut For Investments Request . . . But Not The Territory Of Puerto Rico's

The Congress has approved a territory's request to have the tax rate on outside investors' income from the territory substantially reduced . . . but the measure does not resemble Puerto Rico Governor Sila Calderon's ("commonwealth" party/no national party) proposal to eliminate most of the tax that companies based in the States have to pay on business income from Puerto Rico. The President is expected to sign the bill, which was endorsed by his Administration.

The Congress's action contradicts Calderon's explanation of why her proposal has not passed Congress yet. She says that it has not passed only because there has been no legislative 'vehicle' to carry it into law.

In fact, her proposal has not passed because none of the three lead power centers on federal tax policy like it. The power centers are: Republican House Ways and Means Committee Chairman Bill Thomas (CA); Democratic Senate Finance Committee Chairman Max Baucus (MT); and President Bush's Treasury Department.

The bill that Congress just passed lowers a 30% withholding tax rate on interest, dividends, rent, and royalties that foreign investors earn from Guam. It lowers the rate to the different rates that the U.S. has agreed to through tax treaties with over 60 countries. Thirty percent is the basic federal tax rate on income that foreign investors earn on investments in the U.S. The treaties typically lower the rate to five to 15%.

The bill is expected to spur further foreign investment in Guam, a U.S. territory in the western Pacific. It was needed because Guam's territorial tax rates 'mirror' the Internal Revenue Code as well as take the place of federal taxes.

The federal government has granted Guam the authority to de-link its territorial tax rates from federal rates as the territories of Puerto Rico and American Samoa have. But Guam has not exercised the authority because it has not wanted Guamanians to have to file two income tax forms -- a territorial form on local income and a federal form on U.S. source income. Puerto Ricans pay federal income taxes on income from the States as well as territorial income taxes on income from the islands.

The federal government did not, however, approve Guam's request without amendments. An amendment that was necessary to obtain Administration support denies the lower tax rate in cases of income on which Guam rebates local tax collections.

This amendment was needed to ensure that Guam did not effectively lower the tax rates even further to lower than the rates that apply on income from the States. This reflects a federal policy that the Senate Finance Committee stated in cutting the current tax exemption on income that companies in the States reported from Puerto Rico (Internal Revenue Code Section 936). It also reflects a policy that has handicapped Calderon's investment tax incentive proposal. The proposal would also lower tax rates on profits from Puerto Rico in the case of investments from the States to lower than the rates that apply on income from the States.

New Trade Law Protects Island’s Tuna But Not As Much As Acevedo Said

A major new trade law signed by President Bush August 6 will help protect what is left of Puerto Rico's tuna industry, a 500 worker Bumble Bee plant in Mayaguez. But it will not help in the way that Resident Commissioner Anibal Acevedo Vila ("commonwealth" party/D) publicly announced.

The law cuts tariffs and quotas on products from the Andean nations ñ Columbia, Peru, Ecuador, and Bolivia ñ making the products more competitive price-wise with U.S., including Puerto Rico, made products. The provisions are a further step towards hemispheric free trade, a goal of leaders of both U.S. political parties but a challenge for Puerto Rico's manufacturing economy. Manufacturing in Puerto Rico has been based on having lower taxes and wages than in the States but being part of the U.S. market and, thus, not having products burdened by U.S. tariffs and quotas.

Acevedo told reporters that the law would limit reduced trade barriers on prepared tuna fish from the countries to 20% of the American production. Puerto Rico has produced about 30% of the American total. The rest has been produced in the territory of American Samoa and in California.

Tuna from the countries is a real threat to Puerto Rican production. Puerto Rico last year lost its other tuna plant ñ a Star-Kist facility, which was also in the islands' western flagship city of Mayaguez. The plant moved to Ecuador because lower wages made Ecuador a more profitable location for production. In addition, the plant would not have significantly benefited from Governor Calderon's proposal to exempt 90% of the profits that subsidiaries in Puerto Rico transfer to parent companies in the States. Tuna plants operate on low profit margins.

What Acevedo was referring to was the Senate version of the bill, which included the 20% of American production limitation. Senator John Breaux (D-LA) was responsible for the amendment.

The law, however, includes a different provision. It was written by a "conference" between committees of the House and the Senate. The conference addressed the issue since the House bill did not include the Breaux amendment or, in fact, any provision to protect American, including Puerto Rican, tuna production although Acevedo is a Member of the House.

The congressional compromise limits the reduction of trade barriers on Andean nation canned tuna to 4.8% of U.S. consumption. The amount of canned tuna consumed in the U.S. is much greater than the amount of tuna canned in the U.S. since Americans already consume a great deal of foreign-canned tuna.

The compromise also enables the President to let tuna packed in flexible foil containers into the U.S. market free of tariffs. Flexible foil containers are gaining an increasing share of the market for packaged tuna in the U.S.

The "Washington Update" appears bi-weekly.

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