GOP tax bill could end Puerto Rico's reign as tax haven

By Tax ReformFOXBusiness

Just when you think things couldn’t get any worse for cash-strapped, hurricane-ravaged Puerto Rico—it does.

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The new GOP tax reform bill could put the island at risk of losing its designation as a “tax haven,” forcing foreign businesses to leave due to higher tax penalties.

The final draft, which received approval from the House and Senate on Wednesday, clearing the way for President Donald Trump to sign in early January, calls for a 12.5% tax on any income generated from patents and licenses held by foreign companies outside the U.S. Under the U.S. tax code, companies in Puerto Rico are treated as foreign corporations, even if their parent organization is located in the mainland United States and even if they employ U.S. citizens.

“[The] tax bill they just squeezed through Congress could drive businesses like drug and medical device makers away from the island,” democratic strategist Joel Payne told FOX Business.

The current tax system has allowed Puerto Rico to serve as a tax haven for many drug companies and medical device makers, which can incorporate in the commonwealth as foreign subsidiaries but label their products as “made in the U.S.”

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Before the bill was passed, Puerto Rico Governor Ricardo Rossello wrote a letter to Congress calling the tax reform legislation “a serious setback” for the island, which has been struggling to get back on its feet since Hurricane Maria struck in early October.

Rossello told FOX Business that he has been talking to lawmakers in D.C. this week about the inclusion of “provisions in the Supplemental that address the penalty of the tax reform against the American citizens residing in Puerto Rico.”

“We are confident that the members of Congress will ensure that this reform does not threaten the economic development of Puerto Rico, because the PROMESA Act itself enacted by Congress is intended to ensure financial stability and economic development,” Rossello added.

When reporters asked House Ways and Means Committee Chairman Rep. Kevin Brady (R-Texas) about possibly exempting Puerto Rico from the 12.5% tax on Tuesday, Brady said that other measures are in the works to support the island during its recovery and that they are “absolutely committed to helping [Puerto Rico] rebuild.”

Jack Brewer, CEO and portfolio manager of The Brewer Group, Inc., told FOX Business that he believes Congress will likely consider the majority of Puerto Rico an “opportunity zone”, which should allow companies to invest in the island and pay limited or no capital gains.

“This could offset many of the negative effects of the current tax bill. Puerto Rico is still able to offer companies and individuals their Act 20 and Act 22 Benefits, which allow companies and individuals who move to the island the opportunity to enjoy a 20 years of significant tax exemptions,” Brewer said.

However, Brewer added that at the end of the day, no tax bill will address every individual situation but Congress does have an opportunity to help Puerto Rico, which is currently in the worse economic shape than any U.S. state.

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