Puerto Rico, still facing a daunting recovery after two destructive hurricanes swept through the island last summer, was recently dealt another blow in the form of the GOP Tax Cuts and Jobs Act.
“We feel that the federal tax reform did hinder Puerto Rico,” Gov. Ricardo Rossello said during a conference in New York on Thursday.
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Specifically, a 12.5% tax on profits derived from intellectual property held by foreign companies could damage Puerto Rico’s robust pharmaceutical industry. The intent of this provision, in line with most of the changes to the corporate tax code, is to drive businesses and jobs back into the U.S. by raising the cost of conducting operations offshore.
As a U.S. territory, Puerto Rico is not treated like a U.S. state under the federal tax code despite enjoying state-afforded protections under most other areas of the law. The commonwealth has a solid manufacturing sector, driven in large part by flourishing pharmaceutical operations.
Twelve of the top 20 medical device companies, and the same share of top biotech and pharmaceutical companies, have operations on the island, according to government officials. Those companies include AbbVie, Merck, Amgen and Medtronic.
The Tax Cuts and Jobs Act, which President Donald Trump signed in December, could make it more costly for these manufacturers to continue operating in Puerto Rico. Forty percent of manufacturers on the island are employed within the drug industry, which amounts to about 75,000 people, according to Armando Valdes-Prieto, former director of Puerto Rico's Office of Management and Budget.
Rossello called Puerto Rico’s status and treatment by the U.S. government the “elephant in the room” on Thursday, claiming the relationship is a remnant of a “colonial world.”
“How can you preach democracy if it’s not being practiced in your … backyard” Rossello asked on Monday, adding that before recent hurricanes brought the territory into front-page headlines, many in the U.S. were unaware that Puerto Ricans are American citizens.
Puerto Rico was mired in financial trouble before Hurricanes Irma and Maria made landfall. The entire commonwealth was in bankruptcy, in the midst of an 11-year recession. Its state-owned power authority, known as PREPA, was in default on $9 billion worth of debt. Rossello said on Thursday that about 20% of Puerto Rico’s residents are still without power, five months after Maria ravaged the island.
Gov. Rossello and his administration are currently promoting efforts to draw business investment into Puerto Rico, including its energy sector, after recently deciding to privatize its power authority.
Other reforms are under way in the healthcare, labor and education sectors, as well as a pending infrastructure effort. Rossello said he is working on a “mixed strategy” to provide incentives for multinationals to invest in Puerto Rico.
Rossello’s new fiscal plan for Puerto Rico assumes the island will receive $49 billion worth of disaster aid from the federal government.