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The End Of Fiscal Autonomy


October 14, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Following congressional action this week, U.S. manufacturing companies will soon be paying taxes on their Puerto Rico operations that are higher than what they pay stateside. Moreover, billions of dollars in retained earnings of former Section 936 companies–now controlled foreign corporations (CFCs)–may soon leave the local economy.

Puerto Rico was just excluded from a 9% tax cut on domestic manufacturing income–worth $140 billion and representing the largest federal tax cut in 20 years to U.S. manufacturing firms operating on the U.S. mainland. As a result, and for the first time in more than 80 years, the local manufacturing operations of U.S. manufacturing companies will be taxed at a higher rate (35%) than those on the U.S. mainland (32%). With the acquiescence of Resident Commissioner Anibal Acevedo Vila, Congress has just enacted a tax disincentive to manufacturing investment on the island.

Another tax incentive pushed by Acevedo Vila will, according to staff from Congress’ Joint Committee on Taxation, operate as an incentive to disinvestment from Puerto Rico. It includes CFCs on the island (now most of the former 936 companies) in a one-time, one-year 85% tax cut on income taken out of CFC locations and reinvested in the States.

That these developments have occurred under the watch of a pro-commonwealth administration shows the political motivations that have always influenced the way local administrations, of either major political party, have dealt with the issue of federal tax incentives for Puerto Rico’s economic development.

Pro-commonwealth officials have blamed pro-statehood administrations, from Carlos Romero Barcelo’s on, of opposing Section 936 because that tax incentive in the federal Internal Revenue Code couldn’t exist under statehood, as it is applicable only to nondomestic jurisdictions. And so, when Congress decided in 1995 to finally eliminate Section 936–after many years of reducing its benefits little by little–the Rossello administration then in office was accused of conspiring to kill the incentive.

Pro-statehood officials, on the other hand, have accused pro-commonwealth administrations of pursuing federal tax incentives that apply only to foreign tax jurisdictions and, therefore, couldn’t exist under statehood.

One example is the about-face the Calderon administration (including Acevedo Vila) made from its position during the 2000 elections in support of the wage credit allowed under Section 30A, a tax incentive based on job creation, not company profits, which has made real contributions to the island’s economy but is scheduled to expire, alongside Section 936, on Dec. 31, 2005.

Calderon and Acevedo Vila squandered the opportunity they had inherited to get Section 30A extended beyond that deadline, a proposal on which both Congress and the White House were looking favorably. Instead, they pursued an amendment to Section 956 in an absurd effort to recreate in it the benefits under Section 936 virtually as it was before its reform in 1993–a tax exemption on company profits attributed to Puerto Rico operations that Congress had come to view as corporate welfare because of the enormous tax benefits it provided companies in comparison with the relatively few jobs it created. Any Washington-savvy person should have known Congress wasn’t going to go back to a tax-exemption program based on company profits.

The congressional power that single-handedly blocked the Section 30A extension when President Clinton and Gov. Rossello were in office, House Ways & Means Committee Chairman Bill Archer, left office when they did at the beginning of 2001. Acevedo Vila and Calderon refused offers from congressional leaders to try to get 30A extended. Instead, they have wasted tens of millions of dollars lobbying fruitlessly for their amendment to Section 956, even after the proposal had been rejected by the chairmen of the House and Senate tax committees and by the U.S. Treasury. As we all now know, those efforts went nowhere in the past four years.

More, recently, as the corporate tax cut on domestic manufacturing income was being considered, Acevedo Vila didn’t want Puerto Rico included–again for political reasons, so the island wouldn’t be considered a domestic tax jurisdiction. As a result, all Acevedo Vila has produced is a tax disincentive to manufacturing investment on the island.

It is high time politicians stopped holding Puerto Rico’s economic development hostage to their individual, ideological status preferences.

This Caribbean Business article appears courtesy of Casiano Communications.
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