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US Congress Issues Final Puerto Rican Report

by Glen Shapiro, Tax-News.com, New York

27 December 2016

The US Congressional Task Force, which was asked this year to look at policies to stimulate future economic growth in Puerto Rico, has provided a final report, which includes recommendations on tax changes for both individuals and companies.

The bipartisan Task Force was established in July 2016 by the US House of Representatives and Senate following the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which was passed by Congress to assist a restructuring of Puerto Rico's debt. The legislation is providing the breathing space for an Oversight Board to formulate and enforce budgetary plans and creditor negotiations.

PROMESA set a December 31 deadline for a final report from the Task Force that would recommend changes to federal law that could spur economic growth, reduce child poverty, and attract investment to Puerto Rico.

"The Task Force is of the view that Puerto Rico's best days lie before it, not behind it," its report states. "The members of the Task Force have worked across party lines to identify steps that can be taken to help Puerto Rico's economy stabilize and grow. The Task Force hopes that its work will serve as a platform for continued bipartisan efforts to support the American citizens in Puerto Rico."

Currently, only families in Puerto Rico with three or more children can claim the refundable additional child tax credit (ACTC), and it is capped at the amount of annual federal payroll taxes the family pays. The Task Force confirmed that it reached a consensus to recommend that families in Puerto Rico with one or two children should also be able to claim the ACTC, for an amount equal to their annual federal payroll taxes paid or the standard USD1,000 per qualifying child, whichever is lower.

It has been estimated that this proposal could benefit about 355,000 newly-eligible families and 404,000 newly-eligible children in Puerto Rico, with an average annual credit for all Puerto Rico families of USD770.

However, the Task Force could not reach a bipartisan consensus on an extension of the federal earned income tax credit (EITC) to Puerto Rico. While the EITC could increase labor force participation and reduce child poverty, its introduction in Puerto Rico has been criticized given that its residents are not required to pay federal income taxes on their Puerto Rico-source income.

The Task Force also looked at the prospect of a new corporate tax incentive targeted at Puerto Rico. While not agreeing on the form of any such incentive, it was "open to the prospect of Congress providing US companies that invest in Puerto Rico with more competitive tax treatment as long as appropriate guardrails are designed to ensure the company is creating real economic activity and employment on the island," and recommended that Congress "make Puerto Rico integral to any future deliberations over tax reform legislation."

With regard to other federal tax provisions, it recommended that, as a minimum, the USD13.25 per proof gallon of cover-over (payment) of excise tax revenues to Puerto Rico should be made wholly permanent, rather than the current USD10.50 per proof gallon being permanent and the remaining USD2.75 per proof gallon requiring periodic reauthorization by Congress as part of tax extenders legislation. It reported that "failure to extend the provision will cause harm to Puerto Rico's fiscal condition at a time when it is already in peril."

Finally, it was recommended that the provision allowing a US taxpayer to immediately deduct the cost of a qualified film, television, or live theatrical production, up to USD15m (or USD20m in the case of a production in certain low-income or economically distressed areas), should be extended to Puerto Rico and the other US territories.

The Task Force believed that Puerto Rico "should have the same opportunity as the 50 states and the District of Columbia to generate economic activity and employment opportunities through film, television, and theatrical production, and notes that the ability to showcase local culture and scenery before global film and television audiences can significantly stimulate tourism."

TAGS: individuals | tax | business | tax incentives | fiscal policy | law | corporation tax | payroll | tax credits | excise duty | travel and tourism | legislation | Puerto Rico | United States | tax breaks | tax reform | individual income tax

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