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Treasury Department Seeks To Eliminate IBE Tax Exemption

Hopes to raise $25 million; Bankers Association blasts proposal


February 27, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

In an effort to raise new revenue, Treasury Secretary Juan Flores Galarza has set his eyes on Puerto Rico’s International Banking Entities (IBEs).

Accompanied by Gov. Calderon’s chief of staff, Cesar Miranda, at a press conference at La Fortaleza, Flores Galarza announced a proposal that would eliminate the 100% tax exemption, which Puerto Rico’s IBEs have enjoyed since their inception in 1989.

"The 33 IBEs in Puerto Rico possess approximately $54 billion in assets and during 2001 generated more than $482 million in net income," said the treasury secretary on announcing the administration’s proposal to replace the 100% exemption granted to the IBEs with a 75% exemption. He said the IBEs’ nonexempt income would be taxed at a fixed rate of 10%.

Flores Galarza said the administration expects to raise $25 million as a result of the measure. However, Puerto Rico Bankers Association (PRBA) Executive Vice President Arturo Carrion warned that if the proposal is approved, the capital held by the IBEs in Puerto Rico would flee to other jurisdictions and the proposal would end up generating at best only $1 million to $2 million in revenue.

"More important, it would have the downside of jeopardizing investment in Puerto Rico," Carrion told CARIBBEAN BUSINESS. "In her State of the Commonwealth speech, the governor said Puerto Rico is a world-class destination for investment, but this proposal would go directly against that."

Carrion said the PRBA’s position is that eliminating the IBEs would constitute a step backward and would be contrary to the public policy of effectively inserting Puerto Rico into the global economy. He noted that IBEs around the world generally enjoy total tax exemption. He also observed that the island’s banking sector already pays more than $200 million a year in taxes to the commonwealth treasury.

Commissioner of Financial Institutions Alfredo Padilla, who recently contracted economist Fernando Zalacain to conduct a comprehensive study of Puerto Rico’s IBE regime, said he anticipates intense discussions as the Legislative Assembly considers the administration’s proposal in the months ahead.

"I am going to recommend that IBEs held by the manufacturing sector remain 100% tax exempt," Padilla told CARIBBEAN BUSINESS. "That segment of the IBEs needs to be viewed in a different light from the rest, as their existence helps to give Puerto Rico a competitive advantage in the manufacturing sector."

On the other hand, Padilla said the IBE segment represented by foreign banks in Puerto Rico has remained small and has failed to generate the amount of activity expected when the IBE initiative was launched 14 years ago.

IBEs established by domestic Puerto Rico banks, however, hold the bulk of the group’s approximately $54 billion in assets. In that regard, Carrion reiterated the PRBA’s position that the proposed tax would essentially disintegrate a sector that serves as an effective complement to the local financial industry.

This Caribbean Business article appears courtesy of Casiano Communications.
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