Major Bill Would Get Companies To Send $84b To The States In ’04… More Funding Decisions Acevedo Was Unaware Of - Or Hid

August 15, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Major Bill Would Get Companies To Send $84 Billion To The States In ‘04

A major proposal to drastically cut tax rates in the case of money that companies in the States take out of their ‘Controlled Foreign Corporation’ (CFC) subsidiaries over a six month period would result the subsidiaries sending $84 billion to the States next year. The temporary tax cut applies to assets of CFCs in Puerto Rico and other U.S. territories as well as those of CFCs in foreign countries.

The calculation of the funds that would be ‘repatriated’ is based on the official estimates of the budget costs and benefits of a bill introduced by the chairman of the House of Representatives’ Ways and Means Committee, Bill Thomas (R-CA).

The estimates were included in a report on the bill issued Wednesday by the Congress’ Joint Taxation Committee. Thomas also chairs this committee of leaders of the tax committees of both the House and the Senate.

The CFC disinvestment proposal would reduce corporate income tax rates 80 percent in the case of money that companies take out of their CFCs and reinvest in the States during a single six-month period chosen by each company.

Establishing a CFC enables a company based in the States to delay federal income taxation of earnings outside the States until the funds are repatriated to the States. Multinational companies based in the States can keep the earnings out of the States -- and untaxed -- on a permanent basis.

The "Incentives to Reinvest Foreign Earnings in [the] United States" would only apply to earnings now permanently invested outside the States and repatriations in excess of a company’s average repatriation level. The report also states that tax rates would return to their normal levels after the six months period.

These conditions underscore Thomas’ intent in making the proposal: to get companies to disinvest their CFCs of assets and reinvest the proceeds in the States. This is also the stated intent of Senate as well as House sponsors of similar proposals. All want companies to shift manufacturing from foreign countries to the States to stem America’s loss of factory jobs.

A federal tax expert has said that the proposals would affect companies with CFCs in Puerto Rico in the same way that it affects companies with CFCs in foreign countries. The territory’s representative in the Congress, however, has denied that the measures would cause disinvestment from Puerto Rico.

In fact, Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D) asked to have CFCs in Puerto Rico included when the Senate Finance Committee considered a proposal similar to Thomas’ in May. The Committee then voted 12-6 to do so.

Acevedo saw the measure as a step towards the proposal of Governor Sila Calderon ("commonwealth/no national party) and some major companies based in the States with CFCs in Puerto Rico to permanently cut federal income taxes on CFC profits repatriated from U.S. territories 85-100 percent.

The companies had converted their Puerto Rican operations to CFCs to avoid the taxation that applies to other American corporate income. Currently, the companies pay only 60 percent of the tax. In 1996, the federal government extended equal taxation to the Puerto Rican income of companies based in the States through a phase-in that ends at the end of 2005.

Some island banks are now reportedly concerned about the potential impact of the current CFC disinvestment proposals in the Congress on their deposits as well as on the territory’s economy. Puerto Rico’s largest bank, Banco Popular, is lobbying members of the Congress on the issue.

The proposals are given a good chance of becoming law this fall. The Senate proposal that Acevedo asked to have Puerto Rican CFCs included in was supported by 75 of the 100 members of the Senate in a vote on the issue. Sixty-nine House Members have sponsored legislation similar to Thomas’ proposal.

Thomas hopes to have the House approve his bill in September. Additionally, September is the target month for the Senate Finance Committee’s approval of a bill in the timetable of its chairman, Chairman Chuck Grassley (R-IA). Grassley is currently developing his own version of the bill with the Committee’s top-ranking Democrat, Max Baucus (D-MT).

A bill somewhat similar to Thomas’ has already been introduced by Finance Committee Member Orrin Hatch (R-UT). A major difference from the Thomas bill is that Hatch’s proposes a cut in the taxation of CFC repatriations that would be permanent. The cut would also be 85 rather than 80 percent. The proposal is similar to Calderon’s, but it would provide corporate operations in Puerto Rico with no advantage over operations in foreign countries -- a primary Calderon goal.

Although President Bush said Thursday that the tax cuts he has already obtained from the Congress should stimulate the economy and he has no current plans to propose further cuts for the purpose, some observers think he will in September make a proposal to encourage manufacturing in America.

The joint tax committee’s report on the Thomas bill estimated that the CFC proposal would generate $4.4 billion in taxes next year. This amount represents approximately 5.25 percent of the money expected to be ‘repatriated’ from CFC subsidiaries to parent companies in the States in 2004.

The proposal would cost $1.2 billion in lost taxes over five years and $2.9 billion over ten years, however. The losses would be due to companies not repatriating as much money to the States after their six month periods because they would have shifted profit-making assets, such as manufacturing plant capacity, back to the States. These losses would, however, be offset by taxes on income from doing business in the States.

More Funding Decisions Acevedo Was Unaware Of . . . Or Hid

Last week, UPDATE revealed that Acevedo was unaware of -- or tried to hide -- several congressional decisions on granting substantial amounts of funds for Puerto Rico during the past month. Another instance of Puerto Rico’s Resident Commissioner not being involved with or trying to cover-up congressional action on appropriations for the territory was disclosed this week.

In this case, Acevedo announced a decision regarding a much smaller amount of funding after the actions were taken on much larger amounts in the same legislation. The actions that Acevedo did not disclose included huge losses of funds for Puerto Rico.

As UPDATE reported last week, Acevedo July 20th trumpeted the House Energy and Water Appropriations Subcommittee’s approval of $300,000 for a study of the Martin Pena Canal in San Juan -- 12 days after the fact, five days after the full House Appropriations Committee approved the funding, and two days after the full House of Representatives approved it.

It was disclosed this week that Acevedo’s "news" release also came four days after the Senate Energy and Water Appropriations Subcommittee acted on Fiscal Year 2004 appropriations and three days after the full Senate committee voted on the legislation.

The bigger news, however, was what the Senate committee did. It cut a request for construction to prevent flooding of the Puerto Nuevo River from $16.5 million to $5 million. It also cut Portugues and Bucana Rivers flood control from $5.2 million to $3 million. At the same time, it approved requests of $1.1 million for the de la Plata River and $1 million for the Arecibo River.

Lack of money was not the reason that Acevedo lost the $13.7 million of the total of $23.8 million in requests for Army Corps of Engineers projects that are supported by the Bush Administration. The Senate committee voted to increase Corps construction projects spending from the $1.35 billion supported by the administration to $1.538 billion. The increase was due to the committee increasing the allotments for some projects and adding projects not supported by President Bush to the bill.

It is unusual for a Member of the Congress to lose so much of the funding for construction projects specifically supported by the federal executive branch -- especially when the majority in the Congress is of the same political party as the president. Acevedo has not explained why he did.

He did, however, try to suggest that the cuts were not important, saying that the funds are likely to be granted in future years. He also said his staff would try to get the funds included in the final bill that a ‘conference’ committee of energy and water programs appropriations leaders is expected to work out.

Acevedo also downplayed the importance of the House Appropriations Committee’s rejection of funds for another major water project that was first revealed by UPDATE last week. The $8 million project would bring the filtration plant that processes drinking water for 1.5 million residents of the San Juan area up to federal standards.

The resident commissioner said that if he is not able to get the Senate and a conference committee to add the funds proposed by President Bush back into the bill, the Environmental Protection Agency would loan the money from the Safe Drinking Water State Revolving Fund. He did not explain the additional cost to Puerto Ricans of borrowing the money versus receiving a federal grant.

Acevedo also did not explain why he failed to convince his House colleagues to support the funding and why he did not advise Puerto Ricans of it when he announced the $300,000 study approved in the same bill. It remains unclear if he even knew about the rejection before it was revealed by UPDATE, although the rejection had taken place weeks before.

Additionally, Governor Calderon said that Puerto Rican taxpayers would handle all of the funding if the federal government does not grant or loan the money.

The "Washington Update" appears weekly.

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