Puerto Rico fears tax-plan blow

Levy on intellectual property a threat to jobs, governor says

Three months after Hurricane Maria slammed into Puerto Rico, the sweeping federal tax overhaul that Congress plans to vote on as soon as this week will be another blow to the island's economy, the governor says.

The final legislation negotiated by the House and Senate would treat mainland companies in Puerto Rico, a U.S. commonwealth, as it does those in foreign countries, and impose a 12.5 percent tax on income they receive from intellectual property. The bankrupt Puerto Rican government, which lobbied intensely for special tax treatment, fears that the bill could endanger crucial industries and thousands of jobs on the island.

"This is really a devastating blow for Puerto Rico, in our greatest time of need," Gov. Ricardo Rossello said Friday.

The tax bill's effect on Puerto Rico could have been worse: Had Republicans opted for the House version of the bill, U.S. companies that import goods from their affiliates abroad would have been charged a 20 percent excise tax. That tax, intended to keep U.S. profits from being shifted overseas, would have threatened much of Puerto Rico's pharmaceutical and medical industry. It ultimately did not make the compromise plan.

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Still, the new intellectual-property tax was unwelcome news for leaders dealing with an economy in free fall. Mainland companies -- mostly in medical manufacturing -- make up about a third of Puerto Rico's tax base, and directly or indirectly employ about 250,000 Americans, according to the Rossello administration. Maria forced companies to halt production of drugs, medical supplies and devices, leading to worrisome shortages in places as far away as Iowa. Now, the government worries that those businesses, facing a new tax on top of Maria's vast ruin, could leave the island altogether.

Though Puerto Rico is home to 3.4 million U.S. citizens, the tax code treats the island as both a foreign and domestic entity. U.S. affiliates in Puerto Rico get tax breaks like the ones granted to foreign companies, while the goods they produce are sold as made in the United States.

The tax on intellectual property, which includes patents and design rights, would make Puerto Rico less attractive for business, compared with foreign countries that offer lower tax rates for manufacturers, said Ramon Ponte, president of the Puerto Rico CPA society.

"A lot of companies are going to look at the numbers and decide that, under the circumstances, it's better to leave," he said. "The issue is not Puerto Rico vs. the mainland. It's really Puerto Rico vs. its competitiveness with other foreign jurisdictions."

Congress should consider Puerto Rico a domestic entity if lawmakers want to save American jobs, said Rossello, who spent Wednesday on Capitol Hill making one last push for support. The governor predicted the tax plan would renew debate on the island about its commonwealth status. A vote on the tax bill could come as early as Monday or Tuesday.

Rossello accused Republican leaders -- several of whom made highly publicized trips to Puerto Rico after Maria -- of reneging on Congress' commitment to help the island regain its financial footing.

"Congress essentially turned its back on Puerto Rico, and essentially failed in its mission," said Rossello, a member of the island's pro-statehood New Progressive Party who also identifies as a Democrat. "It's just penalizing Puerto Rico. It's putting Puerto Rico in a worse-off position than it was yesterday."

Last year, a law was enacted to restructure Puerto Rico's more than $70 billion debt. That law was called the Puerto Rico Oversight, Management and Economic Stability Act. It established an eight-member, bipartisan task force that concluded in a December 2016 report that Congress needed to address the complex federal tax policy for Puerto Rico. The report underscored that jobs on the island and in other territories -- including the U.S. Virgin Islands, which were also hammered by hurricanes Irma and Maria -- are American jobs.

"The Task Force believes that Puerto Rico is too often relegated to an afterthought in congressional deliberations over federal business tax reform legislation," lawmakers wrote.

A 2012 Senate investigation found that Microsoft employed 177 workers on Puerto Rico, but reported some $4 billion in earnings there from profits channeled to the island to reduce the software giant's tax burden. Microsoft sold brands and copyrights -- that is, intellectual property -- to its Puerto Rican affiliate to avoid paying higher mainland taxes.

Last month, House Speaker Paul Ryan said lawmakers would address Puerto Rico's tax concerns in negotiations with the Senate.

"It is our intention to make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference," Ryan said in a Nov. 16 statement issued jointly with Rep. Jenniffer Gonzalez-Colon, Puerto Rico's nonvoting member of Congress.

Now, however, it appears Puerto Rico's requests will have to wait until next year, when Congress could draft bills to extend tax credits or make technical corrections to the law.

A Section on 12/17/2017

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