Erosion or elimination of tax advantages, which are believed to be a primary driver of the manufacturing base. If any legislation is enacted that would negate Puerto Rico’s status as a foreign jurisdiction for income taxes, and/or if income tax rates were increased on the CFCs, prior events suggest that Puerto Rico and the region will lose manufacturing jobs.
Further outmigration of skilled labor. Prior to the earthquakes and the pandemic, economic indicators were positive, with Puerto Rico registering a small increase in GDP in 2019. Many stakeholders, as well as research institutions, attribute the outmigration of skilled labor to the poor economic conditions in the region.
Failure to properly upgrade and maintain critical infrastructure was noted as a threat by stakeholders. Stakeholders noted PREPA has neglected to properly upgrade and maintain critical infrastructure in the Region. Others also mentioned projects such as the dredging of the Guayanilla River and Bay, and a project for the sustainable and responsible management of the Southern Aquifer, as projects that they have been waiting for a long time, which affect their economies. The latter is a vital project to effectively manage water resources during droughts in the
southern region, something that affects both the quality of life and the economy of the south.
It is expected that one of the main effects that the implementation of this CEDS will have is that the organization that maintains the SPREDD will help the mayors, and other stakeholders of the southern region identify problems with the infrastructure that impact them economically, or that do not allow them to grow, mainly those that have to do with the maintenance and mitigation of risks and hazards in their critical infrastructure. Collaboration will be key to finding achievable solutions to the identified problems.
The region is susceptible to additional natural disasters (hurricanes and earthquakes), as well as additional risks from climate change, such as sea level rise, etc. Although this is a threat, certain components of natural disasters appear to be understood by major employers in the region. For example, the following is a risk factor noted in Medtronic’s latest annual report: “In addition, several of our key products are manufactured or sterilized at a particular facility, with limited alternate facilities. If an event occurs that results in damage to or closure of one or more of such facilities, such as the damage caused by Hurricane Maria in Puerto Rico in September 2017, we may be unable to manufacture or sterilize the relevant products at the previous levels or at all. Because of the time required to approve and license a manufacturing or sterilization facility, a third-party may not be available on a timely basis to replace production capacity in the event manufacturing or sterilization capacity is lost.”
The U.S. Treasury Department has stated that the credit U.S. firms receive for paying excise taxes under Puerto Rico’s Act 154 is questionable and was never intended to be permanent. In October 2010, the Government of Puerto Rico (GPR) enacted Act 154-2010 to establish a 4% Excise Tax on certain personal property and services transactions between related entities for taxable years commenced after December 31, 2010. Act 154 was approved without hearings, and the companies impacted raised concerns about the ability to credit Act 154 taxes against U.S. income taxes, as it is an excise tax and not an income tax. In April 2011, the IRS issued Notice 2011-29, which essentially stated that it would not challenge the credit-ability of the 4% Excise Tax as a foreign tax credit, as the taxpayers have taken the position that the excise tax is a tax in lieu of an income tax. Some have labeled the IRS’ position on this issue as a “backdoor bailout”23 , as the credit-ability effectively created a federal subsidy for on the Excise Tax paid to Puerto Rico. Originally slated to be eliminated by December 31, 2016, (near the end of the Obama administration) the Excise Tax was extended until December 31, 2027 by the administration of Gov. Ricardo Rosselló through Act No. 3 of 2017.
Former U.S. Treasury Secretary Steven Mnuchin visited Puerto Rico in March 2018, and publicly commented that the credit-ability of the Act 154 Excise Tax was not intended to be permanent and that the Trump administration intended to end the provisions of Notice 2011-29; however, this did not occur. The Biden administration has not indicated any positions on this issue. Should the ability to credit these excise tax payments against U.S. income tax payments, the reaction of the pharma and medical device industries is uncertain.
Continuing and/or new pandemic-related lockdowns could decimate certain sectors of the regional economy. Tourism/Accommodation and Food Services would be the most impacted sector. At present, nearly 5,000 persons, or 8% of the employment base, are employed in this sector.
23 Reuters ‘Backdoor bailout’ boosts Puerto Rico’s revenues February 10, 2014