It does more than organize all tax incentives in one hefty book. The new Incentives Code adopts a standardized legal and administrative framework to evaluate government subsidies intended to foster economic development in Puerto Rico.
Some incentives suffered changes like the ones granted under Act 22. When this law was approved in 2012, an entrepreneur could request the exemptions on capital gain taxes and other passive income if he or she had not lived on the island 15 years prior to the enactment of the law. Two years later, on Dec. 22, 2014, Act 22 was amended to change the requirement to six years. But, as of July 1, 2019, the day governor Ricardo Rosselló signed the measure into law, the period has officially been extended to 10 years.
Initially, those wanting to partake of the benefits of Act 22 were also required to purchase a home on the island. Along the way, that requirement got eliminated and investors were only asked to spend at least 183 days a year in Puerto Rico. However, with the new regulatory framework, the requirement was restituted and the new residents have up to two years to purchase a home.
The third change -and an intensely debated topic during the public hearings- is the $10,000 donation. Originally, it was a $5,000 contribution. After Act 22 was incorporated to the Incentives Code it was increased to $10,000. The first $5,000 can be donated to any charity or nonprofit. But the remaining $5,000 must go to a charity that fights child poverty and is listed with the Joint Special Commission of Legislative Funds.
Manuel Laboy, secretary of the Department of Economic Development and Commerce (DDEC, by its Spanish acronym) said to THE WEEKLY JOURNAL that “the intention is to attract people whose profile includes economic capacity, have not lived in Puerto Rico in recent years and really bring new money into the economy.”
“We didn’t want this to become a backdoor for people who had left recently to come back through this program. That was not the intention,” Laboy added.
Kenneth Rivera, a lawyer, and CPA noted that “this increases and improves the real estate market. The person also creates a stronger bond with the island. Renting is not the same as owning a place.”
As Laboy went over the changes in Act 22, he indicated that language was introduced to make commodities, blockchains and digital assets eligible for the exemption on capital gains taxes and passive income.
“As a final change, the Code establishes a 5 percent fixed rate on capital gains on any capital appreciation and other assets held by the individual prior to becoming a resident of Puerto Rico but that are recognized after having lived 10 years here and before January 1, 2036,” Laboy stated.
Since the approval of Act 22 to June 26, a total of 2,351 decrees have been approved. The goal for this administration, according to Laboy, was to reach the a 5,000 decree goal but, after Hurricane Maria, the DDEC doesn’t think it will hit the mark.
When reviewing the Incentives Code, Rivera pointed out that lawmakers introduced clearer guidelines to help measure the government’s risk and add fiscal transparency to the process along with investor accountability.
“All these incentives are going to be subject to analysis based on the return on the investment. For instance, that evaluation will asses how much money is an investor saving in comparison to the benefit that he generates for the country. Other things that will be taken into account are the number of employees, the amount of taxes paid, any positive impact to the society”, Rivera indicated. “If the numbers don’t add up, the government can cancel the benefit."
In the 90s, the DDEC published a listing with the name of the company and its tax-exemption decree. But the practice has long since been abandoned.
“I remember going thru the book,” Rivera told.
With the new Code, a listing of names, types of decrees and a global tally of the government’s investment will be published for the public to review.
Not Everybody is a Fan of Tax Exemptions
Former governor Carlos Romero Barceló has criticized Act 22 and called for the abolition of the law. He has gone as far as to state that Puerto Rico is a colony of these investors that don’t pay taxes. For Romero Barceló, one possible option to increase government revenue would be to raise the 4 percent excise tax on multinational manufacturers operating on the island.
“It is not contemplated at this moment,” Laboy responded to Romero’s argument.
The head of the DDEC also rejected the notion that Puerto Rico is a tax haven or tax paradise like detractors of the incentive regime claim.
“What we are is a jurisdiction with highly competitive tax and economic incentives. Right now we have 73,000 direct well-paid jobs that are incentivized in the manufacturing sector that represents 45 or 46 percent of the economy. These jobs pay an average of $35,000 to $40,000. When you consider the indirect and induced jobs, the numbers rise to almost 220,000”, Laboy insisted.
“The Incentives Code will promote investment and exports and create good jobs,” he added.