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Tax Reforms In Puerto Rican Debt Relief Plan

by Mike Godfrey,, Washington

11 September 2015

The Working Group for the Fiscal and Economic Recovery of Puerto Rico, which was appointed by Governor García Padilla, has delivered a Fiscal and Economic Growth Plan (FEGP) that contains further corporate tax reforms.

The FEGP puts forward recommendations to help the Puerto Rican Government rebalance its finances, and to form the basis of its negotiations for debt relief from its creditors. It is believed that, even if its proposals are put into effect, substantial residual fiscal deficits will persist.

The cumulative financing gap for Puerto Rico is projected to be USD27.8bn from fiscal year (FY) 2016 to FY2020, absent corrective action. Even with the estimated impact of the proposed measures, the Working Group still projects a cumulative financing gap during the same period of USD14bn.

It has been calculated that Puerto Rico's total borrowings (which have been boosted in the past by its bonds being tax exempt) have already reached US72bn, or over 100 percent of gross national product. The Working Group believes both the level and the servicing of that public debt is "not sustainable."

The FEGP therefore recommends measures to "address financing gaps and the debt load; ensure budget compliance; provide greater financial transparency; and carry out structural reforms necessary to restore economic competitiveness and growth."

In particular, the Working Group considers that Puerto Rico's current corporate tax code "is too complex, distorts economic choices, and produces horizontal inequities," and it recommends the implementation of "a pro-growth corporate tax regime."

The FEGP proposes a reduction in headline corporate tax rates and the elimination of inefficient corporate deductions and tax credits, to produce a "flatter, lower-rate corporate tax regime for both new and existing companies."

In addition, after a dialogue with existing US multinationals in an effort to retain and attract their investment, it recommends that the existing four percent excise tax be extended for an additional five-year period. That tax currently provides around 20 percent of Puerto Rico's tax revenue, and its maintenance is considered "necessary to ensure revenue certainty during the fiscal and economic adjustment period."

However, the new tax regime would also seek to substitute that tax and its revenues over time without increasing the overall tax liability to existing companies, including multinationals that currently do not credit the excise tax against US federal income.

With respect to foreign multinationals, the current tax incentive framework would be amended for all new companies going to Puerto Rico, and for all existing companies after the expiration of their current tax grants.

It is also recommended that the US Congress be requested to provide Puerto Rico with tax treatment that encourages further US investment on the island, such as permitting US-owned businesses in Puerto Rico to elect to be treated as US domestic corporations; and, in the event the US moves towards a territorial taxation system, exempting Puerto Rico from base erosion and/or minimum tax measures.

The FEGP also looks for an improvement in tax administration and enforcement to provide significant additional revenue for the Government. In particular, "the use of tax amnesties and closing agreements would be restricted, to increase revenue certainty and reduce tax evasion."

TAGS: compliance | tax | investment | business | tax compliance | fiscal policy | corporation tax | tax credits | excise duty | enforcement | multinationals | tax rates | Puerto Rico | United States | tax breaks | tax reform | business investment

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