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Threat of more than 60 companies closing after sections 936 / 30A phaseout takes Secretary Silva to Washington, D.C.

Opportunities abound to turn Puerto Rico into the ‘Singapore of the Caribbean,’ says Silva

BY MARIALBA MARTINEZ of Caribbean Business

June 30, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Department of Economic Development & Commerce Secretary Jorge Silva has been delivering a menu of economic-development options for Puerto Rico during visits with members of Congress in Washington, D.C., trying to turn the island into the "Singapore of the Caribbean" because of its pharmaceutical and life-sciences capacities.

Silva gave the presentation before the Puerto Rico Pharmaceutical Industry Association (PIA) monthly meeting. Data from a Puerto Rico Industrial Development Co. study states that approximately 60 companies still operating under Internal Revenue Code sections 936 and 30A, which end Dec. 31, have more than a 60% closure possibility without an incentive replacement. There are critics of this point of view, such as Eli Lilly & Co. Tax Adviser Carlos Bonilla, who told CARIBBEAN BUSINESS last year that most U.S. companies already had made adjustments to their tax structures post-IRC sections 936 or 30A.

"The end of Section 936 will be largely unnoticeable," said Bonilla, also a PIA executive committee member. "One of the possible effects will be that the island’s pharmaceutical companies will increase their production of blockbuster products [products that sell more than $500 million annually]. The only way to maximize earnings in Puerto Rico will be by becoming a CFC [controlled foreign corporation]. If companies manage their finances well, it still will be worth transferring [the production of] new products to Puerto Rico."

Astrid Navarro, Merck Sharp & Dohme Corp.’s director of finance & administration and PIA finance committee chair, also said, "There shouldn’t be an impact on the commercial [sales & marketing] area. There are many pharmaceutical companies in Puerto Rico, and the majority have a commercial division though not necessarily a manufacturing operation. [The end of IRC sections 936 and 30A] shouldn’t have a direct impact on Puerto Rico’s market. As long as each company continues to improve its bottom line, we will continue to increase our workforce."

Still, Silva has managed what the Puerto Rico Legislature and executive arms haven’t: to form an alliance with Resident Commissioner Luis Fortuño (from the New Progressive Party) and Puerto Rico Federal Affairs Administration Executive Director Eduardo Bhatia (of the Popular Democratic Party) and, on behalf of Gov. Aníbal Acevedo Vilá, agree on five options to improve Puerto Rico’s economic agenda.

"The solutions we propose are for a renewed partnership between Puerto Rico and the U.S.," said Silva. "We want to make sure we are projecting proposals that make sense, in line with what the U.S. government wants to promote, such as keeping intellectual property in U.S. territory. First, we shared Puerto Rico’s efficiency plans, which are increasing collections, reducing expenses, and improving services.

"But most importantly, I shared our focus on life-sciences based on our successful history and the trends in this industry. Puerto Rico’s pharmaceutical sector keeps growing, exports are reaching almost $40 billion annually, and among the companies represented are most pharmaceutical and the larger biotechnology corporations. The economic trend in life sciences is a reverse trend to other manufacturing sectors, which have lost thousands of jobs. This is a clear indication that we have to continue moving in this direction, that we have what it takes to be successful in the biotechnology, medical devices, and pharmaceutical sectors," said Silva.

The five options have been discussed and promoted by not only the government but also business- and civil-sector organizations looking to enhance Puerto Rico’s economic offering, such as the Puerto Rico Manufacturers Association, Puerto Rico Chamber of Commerce, and the Alliance for the Development of Puerto Rico.

They are:

  1. Extend IRC sections 936 and 30A for one year until an economic report about Puerto Rico commissioned by the U.S. Joint Tax Committee from the U.S. General Accounting Office is published. The report was due early this year but now is scheduled for November, which gives little time for legislative measures to be implemented if the island’s economic situation warrants it.
  2. Implement an amendment to IRC sections 243/245 so CFCs can be treated as domestic companies for tax purposes.
  3. Extend a 20% tax credit on research & development to CFCs and local corporations so stateside pharmaceutical companies will transfer their operations to the island, adding significant value to keep intellectual property in the U.S., instead of foreign countries.
  4. Lobby for equal treatment under the American Job Creation Act Section 199 so manufacturing income from U.S. manufacturing firms in Puerto Rico will be taxed at 32% (instead of 35%), in-line with a tax revision made in 2004 by the federal government to incentivize U.S. manufacturing companies.
  5. Attract and incentivize companies that establish their Caribbean regional hubs in Puerto Rico.

This Caribbean Business article appears courtesy of Casiano Communications.
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