US Firms Retain Faith In Puerto Rico Despite Withdrawal Of Tax Break

by Mike Godfrey, Tax-News.com, Washington

28 January 2004

A measure allowing US firms with operations in Puerto Rico to repatriate their profits tax-free is set to expire next year, with no signs on the horizon that the US government is keen to replace the measure.

The provision in the US tax code known as Section 936 has been instrumental in building up a solid manufacturing base in the Caribbean island, particularly in the pharmaceutical sector, which accounts for 25% of the manufacturing industry’s work force of approximately 120,000.

However, the prospect of life without Section 936 does not seem to be unduly worrying US companies, which appear to be continuing heavy investment in local manufacturing projects.

"We feel confident because of the number of expansion projects in the pharmaceutical sector," commented Agustin Marquez, executive director of the Pharmaceutical Industry Association (PIA) of Puerto Rico.

"PIA members are also looking forward to the approval of the new clinical-trials tax credit, which we believe will be an opportunity to promote R&D as a new pharmaceutical-manufacturing sector in Puerto Rico and to strengthen the network between the island’s scientists and the pharmaceutical manufacturing industry at the national and international levels," he added.

Several manufacturers have announced expansion projects for the coming year, including a $50 million investment by Medtronic Med-Rel Inc, which will significantly increase the output of its existing plant. Eli Lilley and Johnson & Johnson are also continuing previously announced investment programs which are due for completion in 2004.

However, Puerto Rico Manufacturers Association President, Manuel Cidre warns that Puerto Rico cannot afford to be complacent in attracting further foreign investment.

"If Puerto Rico doesn’t begin to look for ways to incentivize private corporations’ investment in Puerto Rico, we will lose business...to competitors such as the Dominican Republic, Singapore, and Ireland," observed Cidre, adding: "Now, our real competitors are U.S. states, which are looking for ways to strengthen their economies."

In response to Washington’s lack of action on the replacement of the tax break, the government of Puerto Rico has ventured its own amendment to the US tax code, known as Section 956. This proposal would allow US firms to repatriate 90% of their profits tax free, with a 35% tax rate imposed on the remaining 10%.

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