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EFE News Service
Puerto Rico Watches Corporate Tax Breaks Finally Expire
By Yaisha Vargas
25 May 2005
San Juan, May 25 (EFE).- A nearly 30-year-old regimen of corporate tax breaks that fomented a bonanza in this U.S. commonwealth is nearing its end, years after its foreseen expiration drained jobs from the island and without other measures proposed to create them anew.
Under Section 936 of the Internal Revenue Code, which went into effect in 1976, U.S. corporations were exempted from paying federal income tax on profits generated by a qualified Puerto Rican subsidiary.
Thanks to the tax incentives, U.S. corporations flocked to the island, creating jobs and boosting the banking industry, which profited from high liquidity and low rates.
Retained earnings deposited in Puerto Rican banks by the so-called Section 936 corporations totaled $7.6 billion in 1995 but fell to $750 million in December 2004.
Arturo Carrion, president of the Puerto Rico Banking Association, told EFE that financial institutions were in "excellent economic condition" in 1995, thanks to the boom created by the Section 936 corporations, and were able to attract brokered deposits that totaled $2.6 billion 10 years ago and last year totaled $6.3 billion.
"Those $6.3 billion allowed loans with a value of $49.3 billion," Carrion said.
He warned, however, that it was Section 936 that made possible "the low interest rates and made the brokered deposits attractive."
Carrion said Puerto Rico has lost its competitiveness in the industrial sector, which accounts for 40 percent of the gross domestic product (GDP), since the end of the Section 936 incentives was announced.
"Puerto Rico no longer has the seat of honor for industrial investment that it had 10 years ago, and that is seen in the fact that the only investments being made here are for expansions," Carrion said.
The most difficult challenge has been in the labor market, which lost 30,000 jobs as U.S. corporations left the island, according to the banking association chief.
On Aug. 20, 1996, the U.S. Congress repealed Section 936, but it allowed existing corporations to retain the benefits provided by the law for 10 years.
Many of the corporations abandoned the island, leaving behind thousands of jobless Puerto Ricans, while others became controlled foreign corporations (CFC), which enjoy fewer benefits than under Section 936.
The elimination of Section 936 was promoted by then-Gov. Pedro Rossello, who as part of his push for U.S. statehood wanted to eliminate all the benefits that justified retaining commonwealth status, according to opponents of the former governor.
Jose Alameda, an economist and professor at the University of Puerto Rico-Mayaguez, told EFE that direct manufacturing employment totaled 156,000 in 1996. Today, that number is down to 118,000.
Edwin Irizarry Mora, a University of Puerto Rico-Mayaguez professor and secretary for economic affairs of the Puerto Rican Independence Party (PIP), said some of those who lost their jobs moved to the United States in search of opportunities, some families opted to cut back on spending and try to make a go of it, others underwent retraining and some are still without jobs.
"It's been a tough blow for thousands of families ... the fundamental problem is that the manufacturing sector has lost its competitiveness," Irizarry Mora said.