Seven months after the approval of the Incentives Code, the Department of Economic Development and Commerce (DDEC by its Spanish acronym) published a draft of the regulation that will guide the application process and issuance of decrees and tax credits under the local Opportunity Zones (OZ) program.
The public has 30 days to submit comments and suggestions.
“Once this period ends, we will evaluate and incorporate the recommendations we deem pertinent. Opportunity Zones are estimated to generate over $600 million in investments and create thousands of jobs,” said Manuel Laboy, secretary of economic development and a member of the Committee of Priority Projects in OZ, in a statement.
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The 17-page document, posted on the agency’s website (http://www.ddec.pr.gov), was “way overdue,” stated Giovanni Méndez, a tax attorney at the advisory firm Global Economic Optimization in Santurce.
On Dec. 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act that created the OZ, a federal incentives program that seeks to bolster economic development in distressed areas by encouraging long-term investments through significant tax breaks. The designation as an OZ lasts for a period of 10 years. As part of this legislation, 98 percent of the island was designated as an OZ.
A year and five months later, former governor Ricardo Rosselló signed into law a parallel version of the OZ Act, creating the legal framework for investing in these designated areas and priority projects on the island. This law was later incorporated into the new Incentives Code.
Now, the proposed regulation presented at the end of January, broadly defines the terms “priority projects”, “significant expansion” and “return on investment”, while describing the process of approval and rejection of a request for the tax incentive.
The draft also states that all projects started after July 1, 2019, the day that the Incentives Code became law, are eligible for investment credit.
Méndez noted that the regulation provided a general definition of a priority project, but it didn’t include the list of commercial activities already approved by the Committee of Priority Projects last August, nor did it expand on those broad categories.
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Currently, the list of priority projects appears on the agency’s website. These projects include the development of residential real estate property for low-income housing projects, residential and/or commercial real property for sale or rent, industrial real estate property for sale or rent and the substantial improvement of an existing commercial property for sale or rent.
“This regulation is late and it doesn’t say if the government prefers investment in buildings, office spaces, businesses. In fact, when it addresses the issue of significant expansion, it talks about businesses and then jumps to real estate without differentiating one from the other,” Méndez pointed out.
“Nor does it say what they (the Committee) are going to evaluate, or if they prefer an element to be a priority project. Give me concrete examples of projects so I can tell clients this is the menu of projects that the government is looking for... The original idea behind the Committee of Priority Projects was to identify specific projects,” he added.
However, that is not the only shortcoming the attorney noticed.
Méndez explained that according to the proposed regulation, the secretary of economic development has the authority to make the final determination, which means he can issue or deny the tax credit. The secretary is also the official that will evaluate the petition for reconsideration in adverse cases.
“If the official in charge of the review is the same that rejected the petition why can’t it (the regulation) include the other elements or new criteria that you can bring up during the process,” Méndez stated. “Without a list of the elements for reconsideration, I see the process as very discretionary.”
Chapter 4 outlines the elements that measure the return on investment, but it doesn’t include a numeric formula to calibrate it.
“Again, it is discretionary. This section says what the government is going to evaluate, but not how much. They could have established a percentage or a range of percentage,” said the lawyer.
To respond to these concerns, THE WEEKLY JOURNAL sought a reaction from the secretary of economic development. But as of press time, his office hadn’t answered the questions sent by e-mail.