Puerto Rico’s governor has rejected a proposal by the Senate president to include a tax increase on the income of controlled foreign corporations in a tax reform package before the legislature.
According to an October 9 article in El Nuevo Día, Senate President Thomas Rivera Schatz said the pending tax reform legislation should take into consideration “all alternatives” that might result in more revenue for the heavily indebted island, including higher taxes for multinational companies with operations in Puerto Rico. When asked whether the possible reforms include converting the Act 154 excise tax paid by mainland companies on their purchases from subsidiaries on the island to an income tax, Rivera Schatz replied, “That is one [possibility].”
Later that day, Gov. Ricardo Rosselló Nevares told reporters that Rivera Schatz’s proposal to revise the tax treatment of CFCs should be left out of the tax reform legislation, which was first proposed in April. “This isn’t included in the tax reform,” the governor was quoted as saying in the October 10 edition of El Vocero. "The tax reform [package] has a series of primary pillars, including reducing VAT on prepared foods to 7 percent, reducing tax rates for individuals and corporations, eliminating the business-to-business tax, and adding an [earned income tax credit],” he added.
Under tax agreements with the island’s government, nearly all the income earned by the Puerto Rican subsidiaries of mainland companies is exempt from income tax. To generate revenue, Puerto Rico imposes a 4 percent excise tax under Act 154 on purchases by multinational companies from their local affiliates. In 2011 the IRS said it would not challenge any taxpayer’s position that Act 154 excise tax is a tax in lieu of an income tax under IRC section 903 and can be taken as a foreign tax credit against a company’s federal tax liability. The IRS also said that if it ever determines that the excise tax is not eligible for FTC treatment, the decision will not be retroactive.
There has been growing pressure to increase the amount of tax paid by mainland companies to help pay down Puerto Rico’s public sector debt load of $74 billion and to replenish government revenues depleted during a decade-long recession. And uncertainty about whether mainland companies will be able to continue taking the full FTC in the wake of the federal Tax Cuts and Jobs Act (P.L. 115-97) has led some legislators to promote replacing the excise tax with a tax on CFC income that would be fully creditable. One of the TCJA’s key provisions requires companies to pay tax on the global intangible low-taxed income of their CFCs at an effective rate of 10.5 percent (increasing to 13.125 percent after 2025). While foreign taxes on the non-GILTI income of a CFC can be taken in their entirety as FTCs, only 80 percent of foreign taxes paid on GILTI income are creditable under the TCJA.
Rosselló Nevares's chief of staff, Raul Maldonado, was quoted in the El Nuevo Día article as saying the government has been lobbying the U.S. Treasury Department to allow full creditability of GILTI income.
Jeffrey Farrow, co-chair of the President's Interagency Group on Puerto Rico during the Clinton administration, said the likelihood of Treasury taking such a step now is low. “Many experts say the credit is unconstitutional,” Farrow said. “The IRS said the credit was intended to be temporary, and Treasury Secretary [Steven] Mnuchin mentioned that temporary aspect when he was in Puerto Rico in July. For a lot of reasons I’m very skeptical, in light of all we know about the issue, that Treasury would say the [Act] 154 tax is creditable against all federal income tax liability, as opposed to its original and as-yet-unchanged position that it still hasn’t made a decision but will not challenge any companies claiming the credit.”