Senate Approves Puerto Rico Disinvestment Incentive Acevedo Requested

May 16, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

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Senate Approves Puerto Rico Disinvestment Incentive Acevedo Requested

The U.S. Senate late Thursday overwhelmingly approved a special break that would provide a powerful incentive to companies based in the States to take money out of Puerto Rico. The Commonwealth’s Resident Commissioner in the U.S., Anibal Acevedo Vila ("commonwealth"/D), had sought inclusion of Puerto Rico in the legislation.

The measure would cut the 35% tax on corporate income to 5.25% in the case of profits that "Controlled Foreign Corporation" (CFC) subsidiaries outside the States send to parent companies in the States for one year only. It applies to CFCs in Puerto Rico and the other territories of the U.S. as well as to CFCs in foreign countries.

The legislation is intended to cause companies to ‘repatriate’ to the States as much money as possible. It is officially expected to result in disinvestments of up to $140 billion from Puerto Rico, other U.S. territories, and foreign countries.

The proposal was included in a $442 billion economic package that includes $350 billion in tax cuts passed in response to proposals by President Bush, $72 billion in tax increases, and $20 billion in aid to States and the territories.

The package passed the Senate by a vote of 51-49. The CFC disinvestment proposal, however, was approved by a voice vote after senators voted 75 to 25 to defeat an effort to block it.

The CFC disinvestment proposal was an amendment to the package sponsored by Senators John Ensign (R-NV) and Barbara Boxer (D-CA). Ensign had previously led 14 other senators in sponsoring the disinvestment proposal as a bill.

Two similar bills have been introduced in the House of Representatives in which Acevedo serves. Sixty-three House members have sponsored the bills.

The Ensign amendment was defeated 11-10 when the Senate Finance Committee considered the economic package last week. The amendment was proposed by Senator Gordon Smith (R-OR) in the Committee’s ‘mark-up’ of the package.

The Committee rejection came after the panel approved, by a vote of 12 to 6, an amendment to the Smith amendment to include Puerto Rico in the CFC disinvestment proposal. The Puerto Rico amendment was proposed by Senator John Breaux (D-LA). Acevedo claimed credit for getting Breaux to sponsor it.

Breaux has been the principal Senate supporter of Puerto Rico Governor Sila Calderon’s ("commonwealth"/no national party) principal federal economic proposal for Puerto Rico. It bears some similarity to Ensign’s legislation but is different in critical respects.

Acevedo presumably asked Breaux to include Puerto Rico in the Ensign amendment thinking that it was similar in effect to Calderon’s proposal and not understanding what the legislation would actually do.

Calderon’s proposal would cut the tax on income that companies in the States receive from CFC’s in Puerto Rico and the other territories from 35% to 5.25% -- as would Ensign’s -- but do so on a permanent basis rather than for just one year. The difference in economic consequences is substantial, according to experts at the Congress’ Joint Committee on Taxation. (Calderon’s proposal also contains alternative tax cuts on the repatriation of CFC profits from Puerto Rico that would reduce the tax to 3.5% or zero, depending on the method for repatriating profits from territories that a company chooses.)

By substantially cutting the tax on profits earned outside the States for one year

-- with the avowed purpose of not extending the period -- the federal government would strongly encourage companies to repatriate as many assets as possible during the year. Substantially cutting the tax on a supposedly "permanent" basis for income from just the territories would also cause significant disinvestment, the congressional experts have calculated, but it would also encourage some investment.

The Joint Taxation Committee’s economic analysis of the Calderon proposal was reflected in its estimate of the proposal’s cost. It calculated the proposal would cost the federal treasury $33.1 billion in lost federal taxes over a 10 year period with $4.7 billion of the cost coming in the first year alone. The higher first year cost was calculated on the assumption that some companies would quickly move money out of Puerto Rico.

It was judged that some would not expect the "permanent" tax break to last. An additional factor, the experts believe, is that companies probably have some profits that they are holding in Puerto Rico to repatriate if a lower tax rate materializes.

The significance of the inclusion of Puerto Rico to the Ensign legislation was demonstrated by the Taxation Committee’s estimate of its cost. It was initially estimated that the Ensign legislation would cost the federal treasury $3.8 billion. Including Puerto Rico was calculated to make the cost $6 billion. (Readers should note that these costs are amounts of taxes on money repatriated to the States, so the costs represent amounts many times greater in disinvestment from Puerto Rico and other areas.

Due to the efforts of Boxer, the Ensign amendment would require the repatriated

Assets to be used for training and hiring workers in the States, investments in plants and equipment in the States, research and development of projects in the States, or other measures that would increase employment in the States.

Interestingly, Breaux tried to block approval of the Ensign amendment in the Senate late Thursday. He raised a "point of order" that the amendment would exceed the budget for the bill.

The maneuver required the amendment to be approved by 60 votes — versus a simple majority — of the 100 senators. As noted earlier, the amendment was approved with 75 votes.

Breaux has been the leading supporter of Calderon’s proposal in the Senate. He proposed the inclusion of Puerto Rico in the Smith amendment in the Finance Committee (the Ensign legislation) after recognizing that the Committee would not approve the Calderon proposal.

His failed effort to win approval of the Calderon proposal led to a consensus in the Committee that Puerto Rico’s economic needs and alternatives for meeting them should be the subject of a public hearing and considered in the context of reform of "international’ provisions of the tax code.

The "Washington Update" appears weekly.

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