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Several Tax Exemption Issues In The Public Spotlight

Controversies Surface Over Triple-S, Montreal Expos, IBEs


March 20, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

The tax-exempt status granted to several high-profile interests in Puerto Rico has been the source of controversy in recent weeks.

The tax treatment to be given the visiting Montreal Expos next month, the possible termination of tax exemption for the island’s International Banking Entities (IBEs), and the challenge to the tax exemption granted Triple-S Inc., Puerto Rico’s leading healthcare insurance provider, have sparked debate over the justification of certain tax exemptions.

"What people have to understand is that tax exemption is essentially granted to provide an incentive for activity that otherwise might not take place," said economist Heidi Calero. "The purpose isn’t to benefit an individual entity per se but to stimulate the activity [the entity] helps create."

Calero pointed to cooperative institutions such as the island’s credit unions, many hospitals, and even the celebration of the 2001 Miss Universe pageant as examples where tax exemptions have supported and generated desired economic activities.

"The question that has to be answered is whether the government gets its money’s worth, so to speak, in exchange for the tax exemption," said Juan Acosta, former president of the Puerto Rico Society of CPAs. In exchange for the tax exemption granted to Triple-S Inc., for example, the government expects the company to make health insurance available to a large segment of the population and to strengthen the island’s healthcare system.

As House Finance Committee Chairman Francisco Zayas Seijo noted, in exchange for a combination of an exemption and a special reduced tax rate granted for the Montreal Expos’ upcoming baseball games, the government will reap both direct and indirect benefits. To cite just one example, the Montreal Expo players themselves will pay Puerto Rico income taxes corresponding to the portion of the season played in Puerto Rico. The Expos are also clearly generating economic activity that otherwise wouldn’t have occurred on the island.

"In the cases of Inter American University, the Ana G. Mendez University System, and other educational institutions, tax exemption is in exchange for promoting an end sought by the government, which is education," said Calero. The same logic applies to the tax exemptions given to hospitals such as Auxilio Mutuo and Ashford Presbyterian, which are directly involved in providing critical healthcare services to society.

"The tax exemption can be justified on the basis of desired economic or social activity," said Acosta, who cited as another example the tax exemption granted to the Ponce Art Museum. "In justifying the exemption, it’s more important to examine how an entity operates than how it was legally organized," he added in reference to the fact that Triple-S was organized as a for-profit corporation in 1959 but subsequently established in its bylaws that it would operate as a nonprofit institution and not distribute dividends.

As Calero pointed out, the fact that tax-exempt institutions may at times generate considerable positive cash flow should not be held against them. "Triple-S is a good example inasmuch as it has had losses for most years since obtaining tax exemption some 23 years ago," said Calero.

In Calero’s view, the threat of removing the tax-exempt status of the island’s International Banking Entities (IBEs) is yet another example of action that could have highly negative ramifications. "The IBEs have been an important part of establishing and promoting Puerto Rico as a leading regional financial center," she said. "In this case, as well as in the others, there are intangible benefits that also result from the tax exemption. It certainly can’t be measured just in terms of the number of jobs directly created by the IBEs."

The island’s IBE regime also provides benefits to local banks, making them more competitive, while Triple-S Inc. is a pillar of the island’s healthcare system, facilitating health insurance coverage for 1.2 million residents. "Puerto Rico would be better served by stricter enforcement of the tax laws it already has than by threatening the tax-exempt standing of these institutions," said Calero.

This Caribbean Business article appears courtesy of Casiano Communications.
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