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PRMA And Local Corporations Speak Out Against Withholding Tax

Legislative improvisation with the island’s economic development must end


June 6, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

The Puerto Rico Manufacturers Association (PRMA) and several corporate representatives are extremely concerned about the possible approval of House Bill 4749, which would impose a 10% withholding tax on commercial loans granted by foreign corporations or partnerships.

The bill was proposed by Popular Democratic Party (PDP) members in the House and could have the support of the PDP Senate members. Initially, it was presented with a 29% withholding tax and subsequently reduced to 10%, plus an additional 5% for companies with investors already doing business in Puerto Rico.

EcoElectrica General Manager Ernesto Cordova, who operates one of two electricity co-generating plants in Puerto Rico, was informed of the proposed bill during his lawyers’ visit to the Department of the Treasury on another matter.

"We met with Rep. Francisco Zayas Seijo and presented EcoElectrica’s position," said Cordova. "More than 90% of our financing comes from nonlocal banks. If a 29% withholding tax were applied to EcoElectrica’s $700 million loan (which already represents $40 million in interests), we would end up paying $16 million annually, something that would literally kill the project. Even by lowering it to 10%, plus 5% tax for existing loans, EcoElectrica would have to disburse $2.5 million annually."

According to Cordova, the power-generating company will have to revise its $1 million budget for community work and contributions to make up for the unexpected tax. The company must also explain to its stockholders why its profits may be reduced by $2.5 million.

"It is ironic that Puerto Rico is going the opposite direction to the rest of the world," said Cordova. "Other countries are opening their doors to investment capital...But these proposed bills close doors to foreign investment. Being in the same industry as [power generator] AES, I speak for both of us when I say no local bank had the capacity to finance our projects. Only two banks, Banco Popular and Scotiabank, own a small percentage of a consortium of 26 banks that finally financed us. In Puerto Rico, banks can’t or don’t want to finance electric power generation projects because of their risk portfolio."

Hewlett-Packard Manufacturing Organization Operating Manager Lucy Crespo is also worried about the effect of the bill on the company’s future expansion in Puerto Rico. "Hewlett-Packard totally opposes House Bill 4749 and agrees with the PRMA’s opposition to its approval. [Despite our cordial relationship with this administration,] we were never consulted about the bill, perhaps because the number of bills under consideration during this session is so large. But this bill in particular took us by surprise."

As a past president of the PRMA, Crespo criticized the legislature’s improvisation with the future of Puerto Rico’s economic development. "The PRMA is against the continuance of legislative improvisation. We must end this. We are an educated country; we need to sit down at the table and discuss any recommendation from the legislature that will impact [our] economic and social development."

Added outgoing PRMA President Manuel Cidre, "Legislators aren’t informed. If they were, how is it possible that the Labor & Human Resources Secretary doesn’t meet with the Economic Development & Commerce Secretary before issuing an opinion about labor legislature that affects our economic development? We need a strategic plan that is shared by the three parties. If this isn’t established, we will continue with this kind of situation."

Edgardo Fabregas, Johnson & Johnson Pharmaceutical Sourcing Group-Americas vice president of Operations, said, "The way this bill and many others are being presented is very dangerous because it is done in an improvisational way. There is no exchange with the people who will really be affected or will benefit from the different laws passed. And this has happened before. These measures require a discussion process."

Cordova’s concern that the project will be passed without considering its damage to Puerto Rico’s competitiveness in the global economy was reinforced when he was told that the administration wanted to balance the budget with the imposed taxes.

"All the government people we spoke to said that the need for this bill was born out of the administration’s wish to balance the budget," said Cordova. "So, to reconcile the budget’s $40 million or $25 million unbalance (depending on whom one speaks to in the legislature), they will approve a bill whose impact will be costlier in terms of business opportunities for the island than what it will achieve because it stands in the way of future investment in Puerto Rico."

This Caribbean Business article appears courtesy of Casiano Communications.
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