Puerto Rico governor reveals details on proposed tax reform, new incentive code

Puerto Rico Gov. Ricardo Rosselló provided more details Wednesday in a televised speech about his proposed tax reform and the new Tax Incentives Code, with which he intends to give back more than $1 billion to taxpayers by 2023 and repeal inefficient industrial incentives.

The new tax plan seeks to redirect incentives to individuals and businesses. The governor’s proposal is aimed at offsetting the blow of President Trump’s tax reform, which treats Puerto Rico as a foreign jurisdiction, forcing corporations to pay higher taxes than stateside companies. Trump’s reform also imposes a 12.5% tax on the intellectual property of local U.S. subsidiaries.

Rosselló proposed increasing from $9,000 to $12,500 the annual salary exempted from paying income tax. He is also proposing cutting from 7% to 1% the individual income tax rate for individuals who make up to $21,000 annually. At the same time, the maximum tax rate for individuals would be cut from 33% to 31%.

“The first thing will be a reduction in the tax rates to individuals. Tax rates won’t be paid for the first $12,500, increasing somewhat what was in the past. From that amount to $21,000, 1% (tax rate) will be paid instead of 7%,” he said in the message broadcast from the Convention Center in San Juan. “And the maximum rate is going to be reduced to 31%. These components are going to start working from now on but will be implemented in 2019 and 2020.”

As for corporations, Rosselló proposed reducing the basic tax rate from 20% to 19% and the maximum tax rate from 39% to 31%. With regard to the business-to-business (B-to-B) tax, he said it would be reduced from 4% to 3% by 2019, and by 2020 it would be completely eliminated. Meanwhile, the sales and use tax (IVU by its Spanish acronym) would be reduced from 11.5% to 7% for restaurant-prepared meals.

“The reduction to the…tax of food prepared in restaurants from 11.5% to 7%, does justice to multiple small and midsize entrepreneurs,” Rosselló said.

On the other hand, the governor said that with the Incentives Code, inefficient subsidies to business operations will be repealed and the money returned to the people.

“For decades, the government has squandered taxpayers’ money to subsidize companies that do not produce jobs or revenue for the treasury. The times when people got no transparency about the return on investment for these incentives, which amount to about $600 million a year, are over,” the governor said.

With the Incentives Code, Rosselló expects to save $300 million to, in turn, finance tax reform. “We are going to return that money that was wasted to the taxpayers,” he reiterated in his speech, which also touched upon a second labor reform.

Puerto Rico Manufacturers Association President Rodrigo Masses said he supported both reforms because, in his opinion, they would create the conditions to create jobs and provide companies and Puerto Rico the tools to be more competitive. Therefore, he anticipated that the entity he represents will be supporting the bills as well.

“All these measures and bills proposed by the governor will be presented to the Legislature, so it remains to be seen what the specific provisions of each bill will be, and the final version of each measure due to the amendments that could be made before becoming law,” a Masses statement reads.

By Eva Llorens Vélez and Dalissa Zeda Sánchez
Puerto Rico governor reveals details on proposed tax reform, new incentive code