Puerto Rico overhauls tax laws to help workers, businesses

Puerto Rico's governor signed a bill on Monday to overhaul the U.S. territory's tax laws in a bid to attract foreign investment and help workers and some business owners amid a 12-year recession.

The bill creates an earned income tax credit, reduces a sales tax on prepared food and eliminates a business-to-business tax for small to medium companies, among other things.

Officials say the bill represents nearly $2 billion in tax relief at a time when the island is struggling to recover from Hurricane Maria and restructure a portion of its more than $70 billion public debt load.

"There's still a lot of work to be done to completely transform the tax system ... but we see it as a good first step," said Cecilia Colon, president of Puerto Rico's Association of Public Accountants.

Gov. Ricardo Rossello said the earned income tax credit will result in benefits ranging from $300 to $2,000 for each worker, representing a total of $200 million in annual savings. He also said an 11.5 percent sales tax on processed food will drop to 7 percent starting in October 2019.

The bill also eliminates a business-to-business tax for businesses that generate $200,000 or less a year, representing $79 million in savings in five years, Rossello said. Nearly 80 percent of businesses in Puerto Rico will benefit from that measure, added Treasury Secretary Teresa Fuentes.

In addition, the new law reduces the tax rate for corporations from 39 percent to 37.5 percent.

"Today marks an important day for maintaining Puerto Rico's competitiveness," she said.

The measure also legalizes tens of thousands of slot machines, but also limits the number of machines owned, with legislators estimating they will generate at least $160 million a year. Up to $40 million of that revenue will go to the government's general fund, with the remaining funds directed to help municipalities and police officers.

However, Natalie Jaresko, executive director federal control board that oversees Puerto Rico's finances, has repeatedly said the island needs a much broader tax reform that improves revenue collection and promotes economic development. She said in a statement the board also is concerned that the government and legislature have not proved that the changes will not "cannibalize" revenues.

Antonio Fernos, a Puerto Rico economics and finance professor, questioned the effectiveness of the new law, which appears to generate less overall revenue.

"It doesn't make sense," he said. "Why are they doing this, especially on an island that is insolvent and needs more sources of revenue?"

Fernos also argued that the earned income tax credit is not enough to lure people out of the informal economy: "I don't foresee anyone abandoning tax evasion schemes."