Acevedo Puerto Rico Disinvestment Proposal Passes Senate…Tax Bill Also Includes Puerto Rico Investment Proposal Acevedo Opposed… Acevedo Misleads Puerto Ricans On U.S. Rum Tax Grants…Conservative Book Criticizes “Commonwealth”…PR Governor Spends PR Tax Money To Help PA -- Not PR -- Get U.S. Grants

May 14, 2004
Copyright © 2004 THE PUERTO RICO HERALD. All Rights Reserved.

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Acevedo Puerto Rico Disinvestment Proposal Passes Senate

On May 11, 2004 the U.S. Senate passed one of Puerto Rico Resident Commissioner Anibal Acevedo-Vila’s ("commonwealth" party/D) biggest mistakes during his three years in Congress.

The bill would reduce the 35% corporate income tax in the case of profits that ‘controlled foreign corporations’ (‘CFCs’) transfer to their U.S. parent companies for reinvestment in the U.S. to 5.25% for one year only.

Acevedo asked to have the provision applied to CFCs in Puerto Rico.

The purpose of the provision is to encourage profits to be taken out of CFCs and put into U.S. investments. Federal experts believe that the temporary low-tax ‘window’ will cause companies to shift hundreds of billions of dollars in earnings.

At the time that Resident Commissioner Acevedo made his proposal to the Senate Finance Committee staff of the Joint Committee on Taxation, it was estimated that it would cause billions of dollars to be reinvested away from Puerto Rico to the States. Resident Commissioner Acevedo, however, said that it would cause no disinvestment from the territory.

He later declined an invitation from the Joint Committee on Taxation to change the provision for Puerto Rico.

Federal income taxes on CFC profits are ‘deferred’ until the money is ‘repatriated’ to U.S. companies.

Most of the large manufacturing operations in Puerto Rico are CFC subsidiaries.

To delay U.S. taxation of Puerto Rico profits being phased in under 1993 and 1996 laws, most manufacturers in the territory took unintended advantage of the CFC deferral by reorganizing their Puerto Rico subsidiaries -- formerly domestic companies -- as CFCs.

CFCs were intended to be subsidiaries of U.S. companies in foreign countries but they can be set up in U.S. territories as well. In order to completely avoid Puerto Rico taxation of territorial profits, most, if not all, of the companies also set up their CFCs in foreign tax havens.

Resident Commissioner Acevedo has boasted that he asked to have CFCs in Puerto Rico included in the provision. He made the request of Senator John Breaux (D-LA), who, in turn proposed an amendment for the purpose that was approved by the Senate Finance Committee 12-6 almost one year ago.

Senator Breaux later endorsed Resident Commissioner Acevedo’s opponent for the governorship of the territory, former Governor Pedro Rossello ("statehood"/D), saying that Governor Rossello would be better for Puerto Rico’s economy.

It is unclear why Resident Commissioner Acevedo sought to have Puerto Rico included in the CFC disinvestment provision. He may not have understood it.

He also, however, may have seen it as a ‘stepping-stone’ towards his federal priority as resident commissioner: permanently lowering the federal tax rate on CFC profits ‘repatriated’ from Puerto Rico to the States from 35% down to zero to 5.25%. The proposal was originated by his political mentor, Governor Sila Calderon ("commonwealth"/no national party) with major drug and other companies with profitable operations in Puerto Rico. It is known as the 956 amendment because it would amend that section of the federal tax code.

Resident Commissioner Acevedo made his one-year 5.25% rate for Puerto Rico CFC profits proposal during one of the occasions in which the Senate Finance Committee rejected the permanent 0-5.25% rate for Puerto Rico CFC profits proposal.

The idea notion that Resident Commissioner Acevedo saw the one-year tax cut as a stepping-stone to the permanent tax exemption was supported by a report on the Internet Web site of Calderon’s offices in the States. The report claimed that the 12-6 vote in favor had been for the permanent 0-5.25% rate proposal rather than the inclusion of Puerto Rico in the one-year 5.25% rate. (The report was taken off the Web site when the Senate Finance Committee complained about it.)

An indication that Resident Commissioner Acevedo may now realize that he made a major mistake with the proposal came in a news release he issued on the bill. The release omitted any mention of this provision of the bill, although it may have the greatest impact on Puerto Rico’s economy of any of the bill’s provisions.

Tax Bill Also Includes Puerto Rico Investment Proposal Acevedo Opposed

The tax bill approved on May 11, 2004 also includes a permanent tax cut for manufacturing profits from Puerto Rico that Resident Commissioner Acevedo opposed.

Resident Commissioner Acevedo’s news release on the bill also did not include any mention of this provision.

The incentive for manufacturing in the territory was proposed by the presumed Democratic Party nominee for president of the United States, Senator John Kerry (D-MA). Senator Kerry, however, made the proposal when the Calderon/Acevedo 956 tax exemption, which he opposed, was defeated for the second time in the Senate Finance Committee.

The bill cuts the 35% corporate income tax rate to 32% for earnings from ‘domestic’ manufacturing. As originally drafted by the Committee’s Republican and Democratic leaders, profits from Puerto Rico would not have qualified for the tax cut. Senator Kerry led the Committee in extending the tax cut to manufacturing operations in Puerto Rico organized as domestic subsidiaries.

When the Committee approved the Kerry amendment, Resident Commissioner Acevedo fumed "That’s not what we want!"

Resident Commissioner Acevedo’s news release on the bill also did not mention another of the measure’s economic benefits for Puerto Rico. This provision would lower the federal tax-withholding rate on profits that Puerto Rico companies earn in the States from 30% to 10%.

Federal tax law generally withholds 30% of the earnings that companies from outside the States earn in the States. The purpose is to ensure that the companies will pay U.S. income taxes.

The law, however, also includes provisions lowering the rate in the case of companies in many countries and other U.S. territories.

Puerto Rico’s Banco Popular complained that the 30% withholding was creating a major problem for its extensive operations in the States. It obtained the withholding tax cut through lobbying by Quinn Gillespie, a top Washington lobbying firm.

Resident Commissioner Acevedo had no real involvement with the provision. In fact, he was unaware that it was included in the bill until days after the bill passed the Senate.

Quinn Gillespie also represents Puerto Rico’s capital city of San Juan and the Puerto Rico Conservation Trust. Its operation includes two Puerto Ricans, Manuel Ortiz and Juan Carlos Iturregui.

Mr. Ortiz, additionally, represents Resident Commissioner Acevedo’s opponent Governor Rossello in the States and has been a prominent supporter of Senator Kerry’s presidential campaign.

Acevedo Misleads Puerto Ricans On U.S. Rum Tax Grants

The one provision of the tax bill that Resident Commissioner Acevedo mentioned in his release extends an increase in the amount of federal excise taxes on rum brought into the States from Puerto Rico, the U.S. Virgin Islands, and foreign countries granted to Puerto Rico and the Virgin Islands from the end of 2003 until the end of 2005.

A permanent federal law grants the two territories $10.50 of the collections of the $13.50 per ‘proof gallon’ tax. In 1993, the grant was increased 80 cents per proof gallon for five years.

When the 80-cent increase expired, President Clinton, working with then Governor Rossello, then Resident Commissioner Carlos Romero Barcelo (statehood/D) and others, convinced the Congress to increase the grant for another temporary period to $13.25 of the $13.50.

The Senate tax bill would continue the temporary $2.75 increase. This would provide Puerto Rico with about $60 million a year.

Fifty cents per gallon of the funds would be required to be transferred to the Puerto Rico Conservation Trust.

Resident Commissioner Acevedo’s release claimed the funding as his own. An informed source, however, said that approval of the provision was really due to lobbying by the Conservation Trust and its Washington team.

Resident Commissioner Acevedo’s release also did not reveal that he had unsuccessfully sought to have the grant increased to the full $13.50 per gallon.

But neither of these faults were the most misleading aspect of the release. Resident Commissioner Acevedo’s claimed that Puerto Rico had not been granted the full amount of the collections for 20 years because of a "corrupt" practice by then Governor Romero Barcelo.

Instead of "corrupt," the practice was legal. Further, it was authorized by the Puerto Rican Federal Relations Act; a law that Resident Commissioner Acevedo claims is a basis of "commonwealth." (Acevedo contends that Puerto Rico is a "commonwealth" rather than the unincorporated territory that it is.)

The Puerto Rican Federal Relations Act originally provided that all federal taxes on all Puerto Rican products would be granted to the territory. When Romero was governor, an increasing amount of the taxes granted was due to alcohol that was distilled in the States but flavored and bottled in Puerto Rico as a beverage.

The increase caused the U.S. Treasury Department to ask Romero to deny support to companies that engaged in the business.

When the Romero Administration then denied support to a company from Louisiana that sought to get into the business, however, the senior U.S. senator from the State complained.

The senator, Russell Long (D-LA), was the top Democrat on the Senate Finance Committee. When a 1984 tax bill increased the tax on alcoholic beverages from $10.50 to $12.50 per gallon, Long acted to retain the additional $2 in the federal treasury in the case of collections of the tax on Puerto Rican, Virgin Islands, and foreign rum.

The law also unilaterally amended the Puerto Rican Federal Relations Act -- a blow to Resident Commissioner Acevedo’s "commonwealth" theory -- to limit the grants to tax collections on rum.

Conservative Book Criticizes "Commonwealth"

A new book by a nationally recognized investment expert who has lived in Puerto Rico for decades and an icon of conservative Republican economics offers a harsh criticism of Puerto Rico’s continuing territorial status, misleadingly called "commonwealth."

Puerto Rican Alexander Odishelidze and economist Arthur Laffer, the main theorist behind the economics of the Reagan Administration wrote the book.

The volume also includes a forward by Reagan aide and national television commentator Larry Kudlow. It has been endorsed by: former Republican vice presidential candidate Jack Kemp, who still has great influence in his party; former Attorney General Richard Thornburgh, who served in the administration of the first President Bush; and the former top Republican on the U.S. House of Representatives territories committee, Robert Lagomarsino.

The book contends that the United States as well as Puerto Rico would be better off if Puerto Rico became a U.S. State or a sovereign nation. It is provocatively titled, "PAY TO THE ORDER OF PUERTO RICO - The Cost of Dependence to the American Taxpayers".

PR Governor Spends PR Tax Money To Help PA -- Not PR -- Get US Grants

Puerto Rico’s territorial government last month helped organizations in Pennsylvania seek competitive federal grants that Puerto Rican organizations can also seek.

The Puerto Rico Federal Affairs Administration (PRFAA) -- the territorial government’s offices in the States -- April 22-23 held a seminar to train organizations and educational institutions in the State in obtaining the grants available on a competitive basis. The seminar was the first phase of a two-step grants application-training program.

The second phase of the training will bring the Pennsylvanians to Washington, DC later this year to meet grant officers from several federal agencies.

The territorial government did not charge the groups and schools for the training. It also enlisted the participation of federal agencies in the seminar. Among participating federal agencies were the Departments of Education, Health and Human Services, and Housing and Urban Development, and the Environmental Protection Agency.

As an unincorporated territory of the U.S., Puerto Rico receives lesser funding than a State under several federal programs. It also lacks the votes in the election of the President and in the Congress that States use to obtain more discretionary grants.

The training funded by island taxpayers to enhance the ability of Pennsylvanians to compete against Puerto Ricans and others for federal funds is the ‘brainchild’ of Governor Calderon and her PRFAA Director, Mari Carmen Aponte.

Government Contractor Subsidizing Calderon Candidate’s Fundraising

A law firm reportedly paid $1 million a year in Puerto Rico taxpayer funds by Governor Sila Calderon ("commonwealth" party/no national party) is raising funds for her candidate for the mayor of San Juan, Eduardo Bhatia.

Winston & Strawn is using its offices and personnel for a May 27 Washington fundraising reception and dinner for "commonwealth" party candidate Eduardo Bhatia, a Calderon protégé. Attendance at the reception requires a minimum contribution of $150. Dinner attendees are to give $1,000.

Soliciting funds is Francisco Pavia, a Winston & Strawn lawyer, now based in

San Juan. Other lobbyists with contracts with Puerto Rico’s territorial government are being asked by him to buy tickets.

A woman in the firm’s Washington, DC office, who has reportedly said that she is not a regular employee, is assisting Mr. Pavia. The two are using the firm’s offices and equipment, including telephones and computers.

It is not known whether these ‘in-kind’ contributions to the "commonwealth" campaign are being reported to Puerto Rico election authorities.

Acevedo Sponsors Bill Inconsistent With His Trade Policy

A bill to require federal officials to consult with territorial officials when negotiating trade agreements was introduced in the U.S. House of Representatives May 6, 2004 by Representative Jeff Flake (R-AZ). It was co-sponsored by the representatives of the four of the five populated, unincorporated territories of the United States that have representatives in the House, including Puerto Rico.

The legislation would correct an oversight in current law, which requires consultation with State and local governments but not territorial governments.

The bill takes the opposite approach to territorial trade concerns from the one advocated by Resident Commissioner Acevedo, who co-sponsored the bill.

One of Resident Commissioner Acevedo’s main "commonwealth" objectives is to convince the federal government to cede the power to make trade agreements concerning Puerto Rico to the insular government. Trying to implement the goal is in Resident Commissioner Acevedo’s plans for the governorship he hopes to win this year.

Federal officials have opposed Resident Commissioner Acevedo’s proposal. They have pointed out that the federal government does not have the power to abdicate its authority to determine the foreign policy of the United States and its territories. They have also explained the practical problems that would arise if individual areas of the U.S. had different trade or other policies from those of the nation as a whole.

It is unclear whether Resident Commissioner Acevedo was reversing his stance on the issue by co-sponsoring the bill.

Acevedo Contradicts Prats Again On Federal Plans: This Time Taxes

"Commonwealth" party gubernatorial candidate Resident Commissioner Acevedo May 7th contradicted his running mate to succeed him as resident commissioner on plans for federal tax legislation if the two are elected.

Resident Commissioner Acevedo said that they are not committed to continuing his failed effort to seek 85-100% federal tax exemptions for profits that companies based in the States take from manufacturing subsidiaries in Puerto Rico. He also said that the decision of whether to seek the federal taxpayer additions to the companies’ profits would not necessarily be determined by the findings of studies being conducted now by two offices of the Congress as a whole.

Just days before, Mr. Prats had promised eight large drug companies that he would continue to seek the federal subsidies to boost their profits if the results of the studies made approval at all a possibility. He made the pledge in seeking financial support from them

The General Accounting Office and the Joint Committee on Taxation are conducting the studies. They were requested by U.S. Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Minority Member (senior Democrat) Max Baucus (D-MT) after the Committee formally rejected the Acevedo tax exemptions proposal for the second time.

The studies are expected to expose the flaws in the proposal, which was developed by Governor Calderon and her husband, who was her economic development and commerce secretary at the time. (The two were then married to other individuals.)

With widespread federal rejection of the proposal being among Resident Commissioner Acevedo’s greatest failures in Washington, DC the "commonwealth" party gubernatorial candidate has tried to distance himself from it to eliminate it as a negative issue in his campaign.

Mr. Prats’ promise regarding the proposal in seeking financial support from companies that would obtain tax breaks worth billions of dollars a year threatened to remind voters of one of Resident Commissioner Acevedo and Governor Calderon’s biggest failures in Washington, DC and for Puerto Rico’s economy.

It also threatened to open another front in the growing scandal regarding Resident Commissioner Acevedo’s fundraising. Pledging to seek billions of dollars in unneeded federal tax subsidies for companies in the States while seeking thousands of dollars from their representatives could be considered influence peddling.

Resident Commissioner Acevedo has recently been embarrassed by revelations regarding two large contributions that he took while he was minority leader of Puerto Rico’s House of Representatives, at least one as he was preparing the campaign that resulted in his election to the U.S. Congress. The donations -- which he initially denied -- were $20,000 and $10,000 respectively and made by a prominent businessman. Although Resident Commissioner Acevedo claimed that the $20,000 check was to pay "commonwealth" party expenses, it wound up in a bank account that he and his sister personally controlled. The account was associated with a mysterious "Friends of Anibal Acevedo" entity.

The "Washington Update" appears weekly.

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