The federal government could put another obstacle in Puerto Rico’s road to economic recovery.
The federal government could put another obstacle in Puerto Rico ‘s road to economic recovery.
If Congress passes the bill to revamp the U. S. tax code, companies with operations on the island would be treated as those functioning abroad. The bill would put a 12.5 percent tax on intellectual property income made by those companies. Gov. Ricardo Rossello said Friday that companies would be taxed at a minimum rate of 10 percent on their overseas profits.
The move would make it less attractive for companies in Puerto Rico to stay there since they could get a more favorable tax rate elsewhere.
Heidie Calero, president of HCalero Consulting Group, a firm based in Puerto Rico, said manufacturers on the island would get hit the hardest. This would further cripple the commonwealth’s already reeling economy.
“Manufacturing in Puerto Rico accounted for 47 percent of Puerto Rico’s GDP during fiscal 2016,” Calero said. “That’s not something you can just replace easily.”
“We’re pretty much just getting ready for ‘Maria part 2,'” she said.
Puerto Rico was ravaged three months ago by Hurricane Maria, a Category 4 hurricane that decimated the island’s power grid and pushed thousands of residents to leave.
Companies that could be affected by the tax bill are medical device makers and pharmaceutical makers, which have a lot of intellectual property. Amgen, Eli Lilly, Boston Scientific, Medtronic and Baxter International all have operations in Puerto Rico and are major employers.
A Medtronic spokesman told CNBC the company is still evaluating “the tax bill’s ultimate impact.” Boston Scientific declined to comment. The other companies mentioned did not respond to CNBC’s request for comment.
“It won’t be an easy road moving forward,” said Jose Joaquin Villamil, president of Estudios Tecnicos, an economic consulting firm based in Puerto Rico. “This bill could have a big impact on the companies already established in Puerto Rico.”
Calero of HCalero said the bill gives her a sense of deja vu, recalling the phasing out of a corporate tax break known as Section 936. The break was fully phased out by 2006, when Puerto Rico’s current recession began.
The island’s finances have been in shambles ever since. The commonwealth is struggling to pay a massive debt of more than $70 billion. Its tax base is also dwindling as many residents leave to find better job opportunities and a higher standard of living elsewhere.
Puerto Rico’s population fell to an estimated 3.4 million residents as of July 2016 from 3.7 million in 2010, an 8 percent decline, according to the Census Bureau. Thousands have also left Puerto Rico since the storm hit.
Its unemployment rate is also higher than that of any state, at 10.6 percent, according to the Bureau of Labor Statistics. The island also has a poverty rate of 43.5 percent, according to the Census Bureau, more than double that of Mississippi, the poorest state.
“It is devastating and unconscionable that Congress would do this at this juncture,” Rossello told NBC News last week, when the bill was first released.
