Congressional Advisors: Exempt "Foreign" Dividends From Income Tax… Bush Aide Concerned Governor Would Kill Puerto Rico Status Effort… Puerto Ricans May Not Get Bush Health Plan Benefits… Bush Backs Away From Democracy Promotion Policy… 82% In States Say DC Should Have Equal Votes In Congress

Janauary 28, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

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Congressional Advisors: Exempt "Foreign" Dividends from Income Tax

The staff of the Congress’ Joint Committee on Taxation Thursday recommended exempting dividends earned by "foreign" subsidiaries of U.S. companies from income taxation.

The proposal could have major implications for Puerto Rico’s economy and its future political status. Forty-two percent of the economy is attributable to manufacturing by operations of companies based in the States. Most of the operations are, or are planning to be, organized as foreign subsidiaries.

The recommendation came in a package of options, others of which would also have substantial implications for Puerto Rico’s economy. The Joint Tax Committee staff act as advisors to the congressional committees that determine taxes, the House of Representatives Ways and Means Committee and the Senate Finance Committee.

The other most significant proposal in the package for Puerto Rico would lower the excise tax on distilled spirits from the current $13.50 per proof gallon (a gallon based on the percentage of alcohol) to $8.40.

Through the end of calendar year 2005 at least, the federal government grants Puerto Rico $13.25 of the tax collections on rum distilled in Puerto Rico and on 90 percent of rum imported from foreign countries. After this year, the grants are scheduled to be reduced to $10.50 per proof gallon, although the higher level of the grants has been extended in the past and could be again.

Granting $13.25 was estimated to mean $382 million for Puerto Rico’s treasury for the current federal fiscal year, which ends September 30th, according to President Bush’s budget for the year. The budget estimated that granting $10.50 instead would have provided $79 million less.

The proposal would not benefit the federal budget because it would also increase the tax on beer and wine to $8.40 per proof gallon.

Earnings from "foreign" subsidiaries -- including those in Puerto Rico and other U.S. territories -- are currently subject to U.S. income tax when "repatriated" to parent companies. Until then, income tax is "deferred."

The recommendation to exempt foreign dividends from the income tax did not note that income from Puerto Rico and other U.S. territories is considered to be "foreign." If the proposal is applied to income from Puerto Rico -- as it would be under current law, in addition to economically affecting companies operating or locating in the territory, it could be used as an argument in the debate over Puerto Rico’s status as a U.S. territory.

At the same time, by applying to dividends from foreign countries, the proposal would not provide Puerto Rico with a competitive advantage over foreign countries as a location for subsidiaries. Many foreign countries offer companies lower labor and other costs of doing business. They have posed increased competition to Puerto Rico as a location for manufacturing as the U.S. has lowered or eliminated tariffs on their products.

The exemption would not apply to income from: "passive" investments, such as interest from bank deposits; royalties subsidiaries pay parent companies for assets such as patents; and intra-company sales. It would also be accompanied by tightened rules on shifting of income from taxed U.S. companies to untaxed foreign subsidiaries. These limitations would also likely affect companies in Puerto Rico which have used such devices to avoid U.S. income tax.

The proposal would go beyond a one-time, one-year 85 percent cut in taxes on income that companies in the States receive from "foreign" subsidiaries enacted into law last year. That tax cut is expected to encourage companies to repatriate hundreds of billions of dollars of income, including income from Puerto Rico.

The new proposal would tax some companies more and some companies less. Overall, it would increase domestic income, which would be taxed. It was estimated that the proposal would generate $54.8 billion for the federal treasury, including $2.7 billion next year and $5.3 billion in 2007.

Manufacturers that have operated in Puerto Rico since 1996 and have not become foreign subsidiaries currently enjoy one of two expiring tax advantages over manufacturers in the States as well as foreign countries. One that engendered overwhelming opposition in the federal government, provided by Internal Revenue Code (IRC) Section 936, exempts 40 percent of income attributed to Puerto Rico from the income tax.

The other advantage, provided by IRC Sec. 30A, gives companies a tax credit for wages, investments in plants and equipment, and local taxes in Puerto Rico. Both advantages expire this year, although there have been proposals to extend Sec. 30A for a few more years.

Puerto Rico’s last governor, Sila Calderon ("commonwealth" party/no national party) proposed tax exemption for earnings that "foreign" subsidiaries in U.S. territories -- but not foreign countries -- "repatriated" to their parent companies in the States. One goal was to provide Puerto Rico with a competitive advantage as a location for manufacturing over foreign countries. But the proposal was rejected by the federal government for reasons that included the fact that the proposal would also have given Puerto Rico a substantial advantage over the States.

The proposal led the Republican and Democratic leaders of the Senate Finance Committee to ask the Congress’ Government Accountability Office for a report on Puerto Rico’s economy, the Commonwealth’s treatment in tax and social program laws, Puerto Rico policies, and corporate Puerto Rico activities. They also asked the Joint Tax Committee staff for options for addressing any needs. The reports are expected to be completed this spring and lead to congressional action beginning later this year if needs are identified.

Puerto Rico’s Resident Commissioner in the States, Luis Fortuno (statehood/R) has proposed that Sec. 30A be extended for a few years and that tax benefits for underdeveloped areas of the States be extended to Puerto Rico.

Another Joint Tax Committee staff proposal Thursday that could affect Puerto Rico would consider companies to be U.S. or "foreign" depending upon where their active management is conducted. Currently, businesses avoid income taxation by establishing "shell" corporations in foreign locations, especially foreign tax havens that impose no or few taxes and, sometimes, allow companies to hide information from U.S. tax authorities. The shell corporations primarily exist on paper with all real operations conducted in the States.

According to a tax expert, most if not all of the foreign manufacturing subsidiaries in Puerto Rico have been organized in foreign tax havens so that companies can avoid Puerto Rico income tax as well as defer payment of U.S. income tax.

Bush Aide Concerned Governor Would Kill Puerto Rico Status Effort

President Bush’s point man on the issue of Puerto Rico’s political status is concerned that Commonwealth Governor Anibal Acevedo Vila ("commonwealth" party/D) would use major lobbying resources to stop a serious Bush Administration effort to resolve the question of the U.S. territory’s future political status.

Bush’s liaison to State, territorial, and local governments, Ruben Barrales, is concerned that the effort would be wasted because of the lobbying. Barrales is White House Co-Chair of the President’s Task Force on Puerto Rico’s Status.

The concern led Barrales to call a week ago for the Commonwealth’s differing leaders on the issue to work out a "common agenda," saying that the president’s administration would like them to "agree on a process and solutions." He expressed the hope that last November’s election of new officials in the territory would make this possible.

Barrales also asserted that an agreement would be the development that "would most benefit the residents of Puerto Rico" and that "Puerto Ricans could accomplish great things" with it.

He made the statements after meeting with the director of Acevedo’s offices in the States, Eduardo Bhatia. The statements were also made as Barrales is planning to develop a Task Force report on the issue by the December 6 deadline in a formal Bush executive order.

A serious Bush effort on the issue is a goal of Puerto Rico’s primary representative to the federal government, Resident Commissioner Fortuno, with whom Barrales met this week. It is also desired by large majorities of each house of Puerto Rico’s legislature, including the members who favor nationhood and those who want U.S. statehood.

They know that a serious effort will clarify that Puerto Rico’s alternatives to remaining a U.S. territory without democracy at the national government level -- which none of Puerto Rico’s leaders support -- are statehood and nationhood.

Acevedo hopes that a local effort on the issue instead will convince the federal government to accept his proposed hybrid of nationhood and a U.S. status. Under this hybrid, Puerto Rico would be a nation to which the U.S. is bound. The Commonwealth would determine the application of U.S. laws and enter into international agreements as a nation. The U.S. would grant new aid as well as all current aid and citizenship.

Acevedo’s local effort would be a convention in which he hopes that advocates of true nationhood would join with supporters of his hybrid to outvote statehood representatives. The convention would take pace after a referendum between his convention idea and a statehood party proposal for a referendum to petition the U.S. for the territory’s real options for national government democracy.

After Barrales’ call for the territory’s leaders to reach an agreement on the issue, Fortuno and other Puerto Rico leaders indicated a willingness to try. After meeting with Barrales this week, Fortuno also said that congressional action on the issue would probably not occur until the Task Force report is submitted.

Lobbying led by then Governor Calderon convinced the Bush White House to put off action on the issue during the president’s first term. Among other things, Bush delayed the deadline for the Task Force’s next report from the original deadline established by then President Bill Clinton. Acevedo was involved with the lobbying as Calderon’s resident commissioner in the States.

Calderon spent tens of millions of dollars a year on lobbying in official Washington, where a determined minority can often prevent action. In Acevedo’s case as well as hers, the lobbying resources include Bush informal political adviser Charlie Black, reportedly paid $100,000 a month by Calderon.

Puerto Ricans May Not Get Bush Health Plan Benefits

Puerto Ricans might not be able to benefit from the centerpiece of a health care initiative for low-income families that President Bush announced Wednesday.

The proposal would expand the individual health savings accounts that Bush got created in 2003. Money put into the accounts is not taxed and must be used for heath care expenses. Insurance only pays for expenses that exceed specified amounts.

Bush’s new proposal would help fund the accounts of low-income families. A family of four with an income of less than $25,000 a year would be given $1,000 a year for their accounts. It could also receive $2,000 through tax credits, or checks to the extent that it could not use the tax credits. Families that do not have accounts would be able to get $3,000 in tax credits or checks to pay for health insurance.

Most Puerto Ricans might not be able to benefit from the proposal because the federal government does not tax Puerto Rico income.

Another element of the initiative would appropriate $1 billion more for health care insurance for children of low-income families. Bush also would increase the number of community health centers, which provide basic care to low-income individuals.

Bush Backs Away From Democracy Promotion Policy

President Bush Wednesday backed away from his Inaugural Address policy of promoting liberty and democracy throughout the world, echoing statements by other administration figures beginning the day after the address was delivered.

Bush’s address seemed to require an effort to enable Puerto Rico to attain a status under which Puerto Ricans would be able to vote for officials who make and implement their national laws in addition to foreign democracy promotion efforts: ". . . we have proclaimed the imperative of self-government . . . Advancing these ideals . . . is the urgent requirement . . . of our time. So it is the policy of the United States to seek and support the growth of democratic movements and institutions in every nation and culture . . . The difficulty of the task is no excuse for avoiding it . . . we have essential work at home -- the unfinished work of American freedom."

82% in States Say DC Should Have Equal Votes in Congress

Eighty-two percent of residents of the States polled agreed that the District of Columbia should have equal voting representation in Congress, according to a survey released this week. The survey also found that 78 percent were unaware that the nation’s capital lacked the representation.

Polls have revealed similar support for Puerto Rico having equal voting representation in Congress. DC now only has a delegate to the House of Representatives who can vote in committees and party caucuses -- the same representation that Puerto Rico has through its resident commissioner.

Respondents to the survey were told that DC residents pay federal taxes as well as serve in the military. District representatives, such as Delegate to the House Eleanor Holmes Norton (D), emphasize the fact that DC residents pay all federal taxes to support their voting representation claim and to distinguish it from that of Puerto Rico and the other U.S. territories. They do not explain that Puerto Ricans and other Americans in the territories pay a number of federal taxes -- all of the taxes required of them by the federal government, including, in the case of Puerto Rico, taxes on income from the States.

The release of the poll came as legislation was introduced in both houses of Congress to grant DC equal voting representation: one member of the House with full voting rights and two senators. The "No Taxation without Representation Act of 2005" was introduced by Norton and Senator Joseph Lieberman (D-CT).

In the poll, Republican support for DC voting representation was almost as strong as Democratic support. In recent years, Republicans have blocked DC voting representation initiatives in Congress. DC’s voters vote Democratic by lopsided margins.

In 1978, Congress passed an amendment to the U.S. Constitution to give DC equal voting representation in Congress. But the amendment did not take effect when it failed to be ratified by three-quarters of the States within seven years.

A 1960 amendment gave DC residents equal voting representation in the Electoral College, which elects the president and the vice president of the United States. The U.S. citizens of Puerto Rico and the other U.S. territories cannot vote for president and vice president.

Some Republicans have also blocked Puerto Rico status choice legislation fearing that it would lead to a primarily Democratic State.

The "Washington Update" appears weekly.

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