Pervasive split among Puerto Rico officials on how to deal with tax reform

The “Tax Cuts and Jobs Act” is on track to pass in the upcoming days. It passed in both houses, and after went through committee,being conferenced by members of both houses of Congress to work on a reconciled bill. The US House of Representatives passed its own version in November; the US Senate passing its version in early December. It is set to be put on President Trump’s desk before Christmas.

Part of the Tax Reform states that US Corporations have to pay a 20% excise tax on goods that they produce in foreign countries and bring into the United States.  This is to encourage companies to make their goods in the United States, furthering manufacturing jobs as well. It is also to discourage corporations from using foreign subsidies to reduce their tax burden.

The matter of the fact is that Puerto Rico is still considered a foreign entity, when it comes to tariffs and taxes. According to this, it will treated as a foreign country, even though it is a US territory with American citizens. Companies on the mainland who have subsidiary business in Puerto Rico will be taxed the 20%.

In both the House and the Senate version, Puerto Rico is not forthrightly mentioned. But in both versions, Puerto Rico is considered a foreign jurisdiction for 10% minimum tax on US companies—and on the House version an included 20% tax on imports, and on the Senate version a 12.5% tax on intangible assets.

There is a split among officials in Puerto Rico when it comes to what to do in place of the current treatment that Puerto Rico will receive when the bill passes.

There was a split among officials in Puerto Rico when it came to what to do in place of the current treatment that Puerto Rico were to receive if the bill were to pass as-is. Despite their lobbying efforts and various proposals, none will come to fruition with the compromised bill.  

Puerto Rico Governor Ricardo Rosselló and Mayor of San Juan Carmen Yulín Cruz were essentially on the same page—urging for a change in the language of the bill to directly mention that Puerto Rico is not considered as a “foreign jurisdiction” when it comes to this provision. Rosselló has written that this 20% excise tax was not meant to “slow the flow of capital to and from a US territory.”

There was some talk that no one simply realized that Puerto Rico would be affected, and that Congress will surely change it. But Yulin has expressed that she was not so confident: “The Republican leadership has said, ‘We’re going to change it, we’re going to change it. But it doesn’t change. And there’s been enough time already to time change it.”

Chairman of the Puerto Rico House of Representatives’ Federal, International and Status Affairs Committee, José Aponte Hernández has urged a similar proposition. He argues that the US Congress should just classify the islands as a domestic jurisdiction for tax purposes. This inclusion will be another step towards statehood.

The former Secretary of State of Puerto Rico, Kenneth McClintock, was initially opposed to the tax reform bill. He argues now that it does not modify the treatment of Puerto Rico. He writes that US companies that will continue working as domestic companies in Puerto Rico will see their tax rate drop from 35% and 32% to only 20%. There is no customs or border tax, or a tariff to pay since Puerto Rico is part of the United States, he argues. He states that what we should concentrate on are proposals that will be more beneficial and efficient for the people of Puerto Rico—more so on manners ranging from Medicare to equal expansion on Child Tax Credits and extension of earned Income Tax Credits. In other words, he has urged to concentrate more on the people than companies.

Resident Commissioner Jenniffer González-Colón has favored creating a tax exemption for Controlled Foreign Corporations based on job creation, similar to the previous tax code section 30-A. The Puerto Rican government has favored, in contrast, that Controlled Foreign Corporations be classified as domestic corporations instead.

Colón has worked on various proposals with fellow colleagues at Capitol Hill, to fix the issue in whichever way possible. Following the passing of the bill in the House of Representatives in mid-November 2017, Speaker of the House Paul Ryan has expressed his commitment with Colón to work on tax incentives to help the islands.