The G7 proposal of establishing a global minimum tax on multinational companies to deter overseas profit-stashing would affect both American and foreign multinationals operating on the island, warns Carlos Rodríguez, president of the Puerto Rico Manufacturing Association (PRMA).
In their first face-to-face meeting in two years, the countries comprising the Group of Seven -the United States, Canada, United Kingdom, Japan, France, Italy and Germany- agreed, among other things, that a minimum corporate tax rate of 15 percent is needed to stop multinationals from evading taxes by using tax havens.
This move, championed by President Joe Biden’s administration, “would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the U.S. and around the world,” said Treasury Secretary Janet Yellen.
If passed in the US, could have implications for Puerto Rico
Although this resolution would still have to be scrutinized at the Group of 20’s summit later this year and U.S. congressional action would be required, its enactment worldwide would have dramatic repercussions in manufacturing. “Regardless of whether they reach an agreement, be it more or less close to that number (of 15 percent), it definitely impacts every country that has taxes as part of its benefits for manufacturing,” Rodríguez explained.
Moreover, other critics have warned that the proposal would result in higher costs for consumers, many of whom have been economically affected already by the COVID-19 pandemic.
Likewise, the groups Americans for Tax Reform and the World Taxpayers Association signed a joint public letter explaining that this agreement would "significantly damage the valuable tax competition among countries and would cause undue harm to businesses, workers and economies around the world. A global minimum tax rate would greatly curtail the force of tax competition. This competition between nations offers a critical check on the power of governments and it is vital for ensuring efficient and reasonable levels of taxation.”
Meanwhile, Biden proposed a national tax rate of 21 percent on overseas earnings, up to 13.13 percent higher than the rate enacted under the Trump administration. This rate, which exceeds the proposed global minimum, would require U.S. jurisdictions to increase their competitiveness to carry on the reshoring initiative that has been discussed extensively since the past administration.
Stronger Competitiveness Needed
However, Rodríguez affirmed to THE WEEKLY JOURNAL that in order to attract more manufacturing, Puerto Rico cannot rely solely on tax breaks and incentives provided under laws like Act 60-2019, which consolidated Acts 20 and 22 of 2012.
Invest Puerto Rico launches campaign highlighting the island's assets
“In the case of Puerto Rico, I think it sends a signal once again to the government - this is not the first time that this has happened - that it has to focus on establishing economic development strategies geared towards competitiveness, not purely taxes,” he stated.
Specifically, he argued that the island needs to bolster the multiple elements that determine its ease of doing business, which includes energy infrastructure and costs, the process to obtain permits, broadband networks, telecommunications infrastructure, an educated workforce with an emphasis on STEM fields, and less bureaucracy.
“We still have a long way to go. Taxes, even if they kept them low, are only one of the elements that a company takes into consideration when it is going to establish itself in a country. You have the element of taxes and you have the element of infrastructure, plus you have the element of quality of employers, which we have no problems with. When a company is going to establish itself in a place, it takes countless elements into consideration and we in Puerto Rico still lack a lot in everything that has to do with infrastructure and government agility,” Rodríguez said.
As different countries and jurisdictions compete for their share of the profits, the PRMA president underscored the need for immediate and diligent action.
“At some point, we have to start and if the bus has already left us, we still have to start at some point and the moment is now that we have federal funding. So, it is important that the government reacts with a plan that is agile and fast in terms of everything that has to do with the development of the country’s competitiveness,” he affirmed.
- The Associated Press contributed to this story.