Este informe no está disponible en español.
Opposition To Proposed 10% Withholding Tax
Some say tax on commercial loans from offshore entities could threaten Puerto Ricos competitiveness, credibility
By LUIS A. RAMOS
May 6, 2004
The Legislature is further evaluating proposed amendments to the Puerto Rico Internal Revenue Code that ostensibly would give local financial institutions equal tax treatment after hearing concerns that they could threaten the islands financial system.
The amendments would impose a 10% withholding taxdown from the 29% originally proposedat source on interest from new commercial loans by offshore corporations and partnerships that arent engaged in trade or business in Puerto Rico. Current commercial loans from these entities could be subject to a 5% withholding tax.
In a time when most jurisdictions around the world are seeking offshore investment, Puerto Rico could be seen as adopting protectionist measures. The move stands to dissuade potential investors who may be left without feasible options to enter an expensive and bureaucratic market.
"The assessment of a withholding tax could be construed as promoting a protectionist policy," said Vicente Feliciano, business manager of Advantage Business Consulting. "Pushing this bill to increase Treasury collections could make Puerto Rico lose financial credibility and could derail the islands integration into the global financial system."
"There is concern that the islands competitive capacity could be weakened by the 10% withholding tax, or just about any other tax imposition, since it is understood that not all local projects can be financed from within Puerto Rico [i.e., solely with local capital]," added Alvaro Jaramillo, Citigroups country business manager.
According to the proposal, loans granted by these offshore corporations, including banks, to local financial institutions for use in their ordinary course of business would not have to make any deduction on withholding. Some see this as an attempt to force financial entities not engaged in trade or business in Puerto Rico to go through local financial institutions.
Another issue is that imposing the withholding tax would immediately increase the debt service of all those with current commercial loans from nonlocal financial entities, which would be subject to a 5% withholding tax. Companies are expected to pass their higher operating costs on to consumers. Worse, it could mean the loss of jobs and the deterioration of the quality of life in Puerto Rico.
Puerto Ricos manufacturing industry, for example, could be hurt by companies choosing to shift production to offshore markets with cheaper funds. Ireland, for example, imposes no withholding tax at source on transactions with the U.S.
Supporters of the 10% withholding tax, including the local Treasury Department, claim the measure is about leveling the playing field while increasing tax collections by $25 million a year. They point out that U.S. and foreign companies lacking a physical presence in Puerto Rico arent required to pay local taxes, nor do they directly contribute to employment on the island. Some also claim those companies competing in Puerto Rico have the upper hand when it comes to achieving lower cost of funding because of their lower overhead and lending costs.
"We are living in different circumstances today," said Jorge Souss, a partner at law firm Goldman Antonetti & Cordova. "We are in a borrowers market, where financial institutions need to compete aggressively for each customer. Clearly, there must be parity."
Recent examples include a $700 million line of credit for EcoElectrica, a privately owned producer of electricity, and major hotel projects such as Ritz-Carlton San Juan, Intercontinental Resort Cayo Largo in Fajardo, and Wyndham Martineau Bay in Vieques. All of the projects depended on nonlocal credit to meet their enormous financial needs.
Most industry sources agree that financing projects over $150 million could be intolerably risky for any single bank.
"Hotel construction makes financiers, both private and public, uneasy about the large sums needed, but that money can now be easily accessed offshore," said Rick Newman, president of Flagship Services Corp.
"Everyone should realize that hardly any country can finance its own credit needs and that progress comes with liquidity," added Hector de los Rios, executive vice president of American Business Consultant. This is where offshore financial institutions can help.
Sometimes called suitcase bankers, offshore financial institutions open the market to offshore investors, including venture capitalists, which are attracted to the higher return on local investments. They also give local companies an opportunity to acquire alternate sources of funding offshore.
More important, by injecting large sums of capital into the local economy, offshore financial institutions enhance Puerto Ricos competitiveness in the global market. "In todays business environment, global markets dont need additional barriers," said Newman.
This Caribbean Business article appears courtesy of Casiano Communications.