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Governor Signs Off On Temporary Cut In Capital-Gains Tax

Tax experts question purpose of reduction; Senate minority leader blasts House Treasury Committee chairman


September 16, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Gov. Sila Calderon has signed into law House Bill 4531, to provide a temporary reduction in the long-term capital-gains tax rates.

The new law amends the Puerto Rico Internal Revenue Code to reduce the rates by 50% for transactions that occur during a one-year window from July 1, 2004 through June 30, 2005.

The act requires that the gains be reinvested in Puerto Rico for individuals, estates, and trusts to enjoy the special rates. Tax lawyers consulted for this story noted, however, that the law gives no guidance on the meaning of the local-reinvestment requirement.

"It looks to me like an amnesty of some sort, designed to benefit specific transactions by specific individuals," a top tax attorney told CARIBBEAN BUSINESS on condition of anonymity. "Ostensibly, the purpose is to foster local investment, but the law doesn’t define what ‘reinvested in Puerto Rico’ means. Had they legislated a longer-term reduction or bothered to clarify that requirement, I could see the benefit to it. But as it stands, it seems to me just an amnesty."

"The purpose of the measure is plainly and simply to balance the budget," said Senate Minority Leader Kenneth McClintock.

On the Senate side, McClintock had introduced and obtained majority approval for the "reinvestment in Puerto Rico" amendment and for another amendment that would have extended the window to June 30, 2006, which would have given taxpayers the benefit for a two-year calendar period spanning three tax years. The first amendment survived in the House version, but the second didn’t.

"[House Treasury Committee Chairman Francisco] ‘Ico’ Zayas eliminated the amendment because he doesn’t care about giving tax relief to taxpayers. All he cares about is balancing the budget this year so he can claim they turned in a balanced budget to the new administration," said McClintock.

McClintock said that by shortening the period in which transactions will benefit from the lower rates, the Legislature is forcing taxpayers to sell at a time that isn’t necessarily the best given market conditions, so that the administration may account in the current fiscal year for whatever tax is collected, albeit at the lower rates.

"We are in favor of a long-term reduction in capital gains. That’s why we voted in favor of the version that contained my amendments, but we opposed the final bill that came out of the House. It’s a travesty for taxpayers and just bad tax policy," said McClintock.

House Bill 4531-Temporary Reduction in Long-Term Capital Gains Tax Rates

Type of Transaction: Regular Rate / Special Rate

Individuals, Estates & Trusts

Gain on sale of property in Puerto Rico: 10% / 5%

Gain on sale of stock or participation in eligible corporation or partnership: 7% / 3.5%

Gain on sale of other capital assets: 20% / 10%

Corporations & Partnerships

Gain on sale of property in Puerto Rico: 12.5% / 6.25%

Gain on sale of stock or participation in eligible corporation or partnership: 7% / 3.5%

Gain on sale of other capital assets: 25% / 12.5%

Source: P.R. House of Representatives, Legislative Affairs Office

This Caribbean Business article appears courtesy of Casiano Communications.
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