Acevedo Makes No Real Progress With Navy Secretary On Base Land Use… Details Of Calderon’s Federal Corporate Tax Cut Proposal Disclosed

September 5, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Acevedo Makes No Real Progress With Navy Secretary On Base Land Use

Puerto Rico’s Resident Commissioner in Washington, Anibal Acevedo Vila ("commonwealth" party/D), failed to make real headway this week in a meeting with Acting U.S. Navy Secretary Hanford T. Johnson. Acevedo met with Johnson in his campaign regarding the future of the largest U.S. military base in Puerto Rico, the Roosevelt Roads Naval Station on the island of Puerto Rico’s east coast.

The Puerto Rico gubernatorial candidate has a series of alternative goals regarding the base.

  • The first is to keep it open and have other federal agencies use facilities that the Navy is abandoning.
  • The goal of Plan B is to prevent the fate of the base from being decided by the Congress now. This goal would be achieved by getting congressional leaders on the issue to agree that the need for the base should be considered by a federal base realignment and closure (BRAC) commission -- with the next commission expected to begin work in early 2005.
  • The Plan C goal is to get the congressional leaders to direct that ownership of the base’s 8,600 acres be transferred to Puerto Rico’s territorial government with economic assistance for the island’s east coat region.
  • If none of these proposals succeed, Acevedo at least wants to obtain the economic assistance for the region.

The House of Representatives version of the bill to fund defense activities for the fiscal year that begins October 1 would require the base to be closed within six months and the land to be sold to the highest bidder, with the proceeds going to the Navy.

The Senate version of the bill does not address the subject. A ‘conference’ committee of leaders of both houses of the Congress on defense funding issues is expected to determine in coming weeks whether the provision is included in the final defense appropriations law or not and, if it is included, whether as the House passed it.

The provision was included in the House bill in response to an informal Navy request. The Navy’s position will be a major factor in the conference committee’s decision on the issue.

Acevedo struck out in trying to get Johnson’s support for any of his goals. But he tried to suggest to reporters that he made substantial progress on the issue by getting Johnson to agree that the Navy would only sell the property for uses to which Puerto Rico’s territorial government agrees.

Whether Acevedo realized it or not, Johnson agreed to very little if he made such a pledge as Acevedo claimed. In any case, if the land is sold, it can only be used for purposes to which the territorial government agrees.

Johnson’s unwillingness to make a concession to Acevedo should have come as no surprise. He formerly served as the Navy’s Assistant Secretary for base issues and earlier was one of the highest-ranking officers of the Air Force. Most importantly, he has had no sympathy for the actions of the territorial administration of which Acevedo is a part on the Vieques range aspect of the Roosevelt Roads base issue.

The base’s primary function in recent years was to support Navy and Marine Corps amphibious landing practices on a Navy range on the island of Vieques, PR for all east coast U.S. forces. The range was closed May 1 in response to Puerto Rican demands.

In 2000, military officials and all other relevant federal officials agreed with a territorial administration led by Acevedo’s main rival for the governorship, Pedro Rossello (statehood/D), on a future for the range that included a closure this past May 1 if the residents of the island wanted that. But Puerto Rico’s current Governor, Sila Calderon ("commonwealth"/no national party) broke the agreement -- with Acevedo’s support.

The Navy, which planned to reduce operations at the base if the range was closed, decided the base should be totally closed after Calderon broke the agreement. Officials explained that the territorial government’s reneging on the federal-territorial agreement made it unwise to risk further resources by investing funding in facilities in the territory. Even keeping the base open would be "a waste of taxpayer dollars" in the words of the commander-in-chief of the Atlantic Fleet.

The admiral and other officials substantially reduced activities at the base -- which formerly pumped hundreds of millions of dollars a year into the territory’s economy -- and suggested the unusual base closure provision to congressional ‘appropriators.’

As Johnson told Acevedo, the Navy estimates the value of the land as high as $1.7 billion. A sale would make up for the Navy’s costs related to the closure of the range and the base -- and more. The cost of replacing the range alone has been put at $400 million. And this does not include the costs of closing the base and cleaning up the land, cleaning land of the former Vieques range, and previous policing of the range and temporary foreign replacements needed because of break-ins onto the property.

While Acevedo made no progress with Johnson on the issue, other military and other federal interests in the base are getting some consideration in official circles for the federal government maintaining at least some of it. Military antennae at the base would reportedly be costly to replace. The military’s Special Operations Command is said to want to keep some personnel there although it has already moved most out. The Army reportedly would like to use 200 acres for training. There is also environmental interest in preserving some of the property.

Details Of Calderon’s Federal Corporate Tax Cut Proposal Disclosed

Members of the Congress came back to Washington this week after their August ‘recess’ and Governor Calderon’s Economic Development and Commerce Secretary, Milton Segarra, came to the nation’s capital to lobby them on the governor’s top federal proposal: tax exemption for profits that companies in States receive from special manufacturing subsidiaries in the Commonwealth established as ‘controlled foreign corporations’ (CFCs).

Pressed by reporters, Segarra disclosed details about Calderon’s current version of the proposal which Calderon Administration officials had previously hidden from the public, although he did not release a copy of the actual legislative proposal, which might reveal other details -- and flaws.

Segarra and other Calderon lobbyists are now promoting a revised version of the proposal that Calderon unveiled two years ago because the earlier versions encountered overwhelming opposition from federal officials.

Some of the changes in the revised proposal close loopholes -- one of the major deficiencies in earlier versions. Another change delays the effectiveness of the proposal until 2006 -- after the two current tax benefits related to corporate income from Puerto Rico expire. One of these benefits is provided by Internal Revenue Code (IRC) Section 936, which allows companies to claim a credit equal to the tax on 40 percent of the income that they attribute to their Puerto Rico operations. The other is IRC Sec. 30A, which provides companies with a tax credit for their Puerto Rico wage, capital investment, and local tax costs.

Calderon’s revised proposal still calls for three alternative tax breaks for profits from CFCs in Puerto Rico -- two explained and one still hidden in the proposal’s fine print -- although there have been some changes in the tax cuts.

Under current law, companies do not have to pay the 35 percent corporate income tax on profits from their CFCs -- which are all outside the States -- until the profits are ‘repatriated.’

One of Calderon’s explained, revised proposals would "defer" the tax on 90 percent of profits that a Puerto Rico CFC transfers to the States but "invests" in the States for the parent company rather than permanently pays over to the parent. The tax on the 90 percent would presumably be paid after the profits are actually counted as being the parent company’s, although there would be no deadline for doing this. The presumed eventual tax liability on the 90 percent is another change from an earlier version of the proposal, which would have totally exempted the 90 percent from taxation -- although whether the deferred tax would ever be paid is another matter.

The other explained proposal would enable the parent company to deduct from its taxable income 85 percent of the profits that it receives from its Puerto Rico CFC.

The unexplained tax break in the proposal would exempt "loans" of the profits from a Puerto Rico CFC to its parent company from the requirement that counts for tax purposes interest on loans even if interest is not paid. The purpose of this requirement is to prevent tax evasive transfers of wealth made under the pretense of being loans. This provision of the Calderon proposal would enable companies to effectively, although not technically, take profits from their CFCs without paying tax.

The revised proposal is also said to limit the tax breaks to income from Puerto Rico and to Puerto Rico CFCs. Loopholes that were clear in earlier versions of the proposal would have enabled companies to take the tax breaks on foreign income by funneling the money through their Puerto Rico operations.

The limitation to Puerto Rico CFCs would require companies currently operating in Puerto Rico as CFCs as well as companies using the Secs. 936 and 30A credits to establish Puerto Rico CFCs. An article in the current edition of the International Tax Journal by Puerto Rico tax expert Ralph Sierra, Jr. revealed that most, if not all, the Sec. 936 companies that have established CFCs to avoid federal income taxes set up the CFCs for their Puerto Rico operations in foreign "tax havens." This maneuver has enabled the companies to avoid paying Puerto Rico income tax on their non-Puerto Rico operations as well as defer federal taxes on their Puerto Rico and foreign income.

Segarra said that the revised proposal would cost $4.2 billion in lost federal revenue over 10 years versus the up to $33.1 billion cost of Calderon’s original proposal. But officials of the Congress’ Joint Committee on Taxation estimated the cost of an at least earlier version of the revised proposal at $600 million a year. Additionally, Calderon aides estimated the cost of the original proposal -- which was later found to be $33.1 billion over 10 years -- to be $1 billion-$1.5 billion over the same time period. Significantly, however, the first cost of the proposal would not arise until 2006 versus the earlier version’s major cost -- over $4 billion -- the first year alone.

The cost of the original proposal was one of the factors that caused the initial federal opposition.

The revised proposal’s cost -- although much less than that of the original proposal -- will still be a significant factor in federal consideration of the measure. The federal deficit has reappeared and ballooned since Calderon first made her proposal. A $4.2 billion -- or $6 billion -- cost would have been more viable then than it is now.

Calderon’s earlier versions of the proposals also generated overwhelming opposition because of their loopholes and the policies that they reflected. The revised proposal will still raise some of the same policy concerns. For example, the proposal would provide companies with very profitable operations in the territory with a $4.2 billion-$6 billion windfall without requiring the companies to create more jobs or make more investments in the territory.

The proposal will also face new policy concerns. It was first made before a precipitous drop in manufacturing in the States over the past two years. The transfer of manufacturing jobs in the States to foreign countries has become so huge that President Bush, who previously said his existing tax cuts should stem the tide of losses, this week said that additional measures would have to be taken.

The Calderon proposal would give companies that are profitable enough to retain jobs in the territory -- and, in many cases create new jobs -- billions of dollars of benefits while millions of jobs are being lost in the States and equal benefits would not be given to companies that want to maintain jobs in the States.

The issues will be exacerbated by Calderon’s efforts to have her proposal added to legislation that would provide a lesser incentive to companies to move manufacturing jobs back to the States from foreign countries, an incentive that is expected to contradict Calderon’s proposal.

The legislation is intended to reform the taxation of the international activities of U.S. companies. One major version, introduced by House of Representatives Ways and Means Committee Chairman Bill Thomas (R-CA), would cut the 35 percent corporate income tax by 80 percent for six months in the case of repatriated CFC earnings. Other versions of this proposal -- including one that passed the Senate but died in a House-Senate conference committee -- would cut the tax by 85 percent for one year.

The proposals are intended to be limited in duration to encourage companies to move assets -- and manufacturing jobs -- back to the States. It would be difficult to explain why major tax cuts would be afforded on a permanent basis to companies with operations in Puerto Rico when very similar tax cuts are available to other companies on only a very short-term basis even though those companies are creating jobs in the States.

Another major proposal, by Senate Finance Committee Member Orrin Hatch (R-UT) would cut the corporate income tax by 85 percent for foreign as well as territorial repatriated CFC earnings on a permanent basis. It would moot most of the benefits of Calderon’s proposal.

A third major bill on the subject is expected to be introduced later this month. It is to be sponsored by Senate Finance Committee Chairman Chuck Grassley (R-IA) and senior Democrat Max Baucus (D-MT) and is scheduled to be considered at the end of the month or in October.

Calderon representatives are still lobbying to have her proposal included in the Grassley-Baucus bill but Resident Commissioner Acevedo conceded this week that inclusion is unlikely. Grassley and Baucus have both previously rejected the proposal and they are said to be considering the 85 percent, one-year tax cut for repatriated CFC earnings that earlier passed the Senate.

Senate Finance Committee Member John Breaux (D-LA) reportedly plans to offer the Calderon proposal as an amendment to the bill, however, when it is considered by the Committee. Breaux: has long championed measures that would benefit pharmaceutical manufacturers; is close to one of Calderon’s million-dollar-a-year lobbyists, Tommy Boggs; and has often actively supported proposals by Puerto Rico’s territorial government.

In May, Breaux proposed adding the Calderon proposal to the national tax cut bill that became law shortly afterwards but he dropped the effort when he realized a majority of the Committee would vote against the proposal.

Calderon lobbyists are working hard to change the positions of members of the Committee. They are counting on active support from Calderon’s closest ally in the Senate, Trent Lott (R-MS), and Senator Rick Santorum (R-PA), who is generally supportive of Puerto Rico measures. They also hope for support from Hatch, who, like Breaux, is close top pharmaceutical companies and formally introduced Calderon’s proposal in the Senate in the last Congress.

The "Washington Update" appears weekly.

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