Legislature passes tax reform, Gov. Fortuño to sign it Monday

Written by  //  January 31, 2011  //  Government  //  No comments

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The Treasury Department is responsible for implementing the new tax
code. (Credit: Mauricio Pascual©)

Following two days of marathon House and Senate sessions, both chambers approved the overhaul of the Puerto Rico Internal Revenue Code, through which the Fortuño administration has promised tax benefits to individuals and businesses to be funded mostly by a new excise tax levied on foreign corporations.

As expected, the New Progressive Party majority passed the voluminous bill over the weekend, with the opposition of Popular Democratic Party lawmakers who on Sunday called the reform “deceitful.” The new tax code’s approval was on schedule, as Gov. Fortuño last week anticipated he would be signing the new law on Monday in Bayamón.

Although the minutiae of the changes will only be fully known in time, some of the broader benefits include:

  • Expanding income scales and applying lower taxes on individual income. One of the most notable changes is that workers making $22,000 or less will pay a 7 percent rate until 2015, when they will no longer pay taxes. Salaried workers who earn up to $35,000 a year will be able to claim a $600 work credit, twice the amount allowed under the current code.

  • Eliminating most deductions that have been approved over the years, leaving only a few of the key ones, such as mortgage interest paid. The so-called “marriage penalty” is also discontinued for couples who file jointly.

  • The special property surcharge payable to the Municipal Collections Center is also eliminated starting this year.

  • Self-employed people will still be subject to a 7 percent withholding tax.

  • On the business side, companies will also see a reduction in the corporate tax rate, while small businesses will be able to keep the deductions and benefits in effect under the current tax law.

Once signed into law, taxpayers who meet their fiscal responsibility between 2011 and 2016 will “see the benefits of the overhaul,” Senate President Thomas Rivera Schatz said Sunday.

Uncertain revenue sources

While the government has said it has the funds to pay for the tax reform, the fact remains that most of the benefits to individuals and corporations will be covered with the revenue collected through a 4 percent excise tax levied on transactions between foreign corporations and the affiliates they have in Puerto Rico. In all, the government expects to collect some $6 billion in as many years through the new tax.

However, Law 154 has sent a ripple through the island’s manufacturing sector, particularly  pharmaceutical companies, which have already halted their expansions and immediate plans for growth on the island pending a confirmation from the U.S. Internal Revenue Service on whether the amount paid can be written-off from the federal tax return. 

While no announcements have come yet, the possibility remains that the tax could prompt the departure of companies, much like the elimination of Section 936 did in the 90s.

The Fortuño administration is also counting on a new electronic lottery game — the IVU Loto — through which it expects to improve its sales and use tax collection rate at the retail level. The pilot program for the IVU Loto launched in Ponce in December and is expected to go islandwide in a few weeks.

See related story: http://bit.ly/fJ7Iko

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