There are 80 foreign financial institutions – listed among the International Banking Entities and the International Financial Entities - which are those that export financial services to non-residents, with a total capital of $64.4 billion.
These institutions came to the island, attracted by the tax benefits of Law 52 of 1989 and Law 273 of 2012 that promote Puerto Rico as an international financial center, explained Natalia Zequeira Díaz, Financial Institutions commissioner. She heads OCIF, as the agency is known by its Spanish acronym, the government entity in charge of supervising foreign banking institutions.
Of the 80 foreign institutions that operate on the island, 27 do so under Law 52 - known as the International Banking Center Regulatory Law - which was created as an instrument to turn Puerto Rico into an international banking center with zero taxes - and they represent the majority of total capital at $63 billion. These institutions are the oldest, most robust and capital-intensive companies, Zequeira said in an interview.
There are 53 others that are under the provisions of Law 273 - known as the Regulatory Law of International Financial Entities, which pay 4 percent in taxes - with a capital of $1.4 billion, belonging to smaller and younger companies.
“The decrees that could be granted by these laws expired in December 2019, but the Puerto Rico Incentives Code (known as Law 60) includes provisions with a 20 percent tax rate, from January 2020 onward,” she reported.
The issue of tax havens came to light after a report detailing how some of the world’s wealthiest people hide their riches. As a result, the release of the “Pandora Papers” has drawn new scrutiny on the growth of tax havens in the United States. The report by the International Consortium of Investigative Journalists has shed light on the financial dealings of the elite and the corrupt and how they have used offshore accounts and tax havens to shield trillions of dollars in assets.
How Offshore Accounts are Established
Zequeira assured that these corporations must apply for a license from OCIF and when they start operations, they must have a startup capital of $250,000 and $5 million to operate - or provide a capitalization plan - in addition to undergoing a rigorous evaluation. They need to have local staff, submit quarterly reports and verification of compliance.
She said these companies - with many coming from Mexico, the Dominican Republic, Colombia, Venezuela, Israel, France and the United Kingdom - are legal and represent an economic benefit for the island.
“A tax haven is not a crime. It has been given a bad connotation... the global statement is not fair. They are tax measures to stimulate the economy and help deposits in banks. These measures and incentives greatly contributed to the fact that we are no longer in recession. Puerto Rico encourages investors to establish themselves on the island for legitimate purposes,” she said.
“These corporations also have a presence in the United States. In South Dakota, there are more than 200. On the island, they must recruit four or more employees (for each entity) and the 80 companies have created close to 1,000 direct jobs and over 2,000 indirect jobs - such as lawyers and accountants - in addition to leasing commercial properties,” Zequeira added.
She assured that OCIF fulfills its oversight responsibilities, but accepted that they work with financial and personnel limitations. “For international depository banks, we only have eight examiners but we are about to get more resources. The entities are audited and if there are deficiencies or they are not in compliance, an action plan is sought or ends with its liquidation. In this jurisdiction there is no space for non-compliance,” she pointed out.
Puerto Rico’s tax benefits, combined with the protection and strict regulations of the U.S., were outlined by Juan Lorenzo Martínez, a CPA and attorney. “These institutions think about the guarantee and security of the U.S. dollar, which is a world exchange currency. Many countries have currency devaluation problems and [people] can lose a lot of money. Another factor is that every American citizen has to pay taxes to the IRS, except Puerto Rico [residents]. If you are a [local] resident, you pay all the money on the island, you do not pay federal taxes,” he explained.
He added that in the U.S. and Puerto Rico, any person who has more than 5 percent in shares in a company must report their identity to the federal government, which is why some entrepreneurs prefer to transfer their money to anonymous accounts in other destinations.
“Anonymous corporations are allowed in Aruba, Panama and the Cayman Islands. Nobody knows who owns the shares, they [make] deposits and nobody knows who owns the money. It is a way to avoid paying taxes and protect yourself from spouses and heirs. In the Cayman Islands they only give you a key and a number and whoever has it is the person who gets the money,” he explained.
“Many prefer these little islands if they want to hide a lot of money, but they risk political changes or currency devaluation. But if you are looking for the safety of the U.S. dollar, you can come here,” he said, after acknowledging that Puerto Rico has some characteristics of a tax haven.