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IRS confirms 4% excise tax can be written off federal return

Outgoing GDB President and Chairman Carlos García.
(Credit: © Mauricio Pascual)

Local manufacturing companies subjected to the 4 percent excise tax imposed in January through Law 154 may want to breathe a sigh of relief, as the Internal Revenue Service has confirmed that they will be able to take a credit on their federal income tax returns for the amount paid in Puerto Rico.

In a statement issued late Wednesday, the Government Development Bank confirmed the IRS’s decision on the matter that had been pending since October 2010, when the law was approved.
“This determination by the IRS has the effect of reducing the tax liabilities that companies are subject to under Law 154, as the Tax Reform has done by providing tax relief to individuals and small and medium businesses in Puerto Rico,” GDB President Juan Carlos Batlle said.
Law 154 was passed in late October and is an amendment to Puerto Rico’s Internal Revenue Code that places an excise tax on sales generated by local subsidiaries to their international parent companies.
The tax, which applies to companies whose sales revenue reaches $75 million, starts at 4 percent during the first year and is reduced every year until fully eliminated in 2016. The government passed the levy to finance its Tax Reform, and expects to collect between $1.4 billion and $2 billion during the first year.
Immediately after Law 154 was approved, affected companies, mostly pharmaceuticals, scrambled to convince Gov. Luis Fortuño to delay the implementation of the tax, which they said could negatively affect local operations.
Stateside and local trade organizations representing the pharmaceutical sector blasted the move, saying, among other things, that it would deteriorate Puerto Rico’s good standing as a place to do business.
However, the government did not back down from its decision, saying the IRS would grant the credit.
The IRS’s decision “recognizes the protection that applies to such companies under federal tax laws, allowing them to reduce their federal taxes for the payment of excise taxes, which is why the tax should not affect their operations on the island,” the GDB said.
“This is a validation of the responsible, serious and careful plan that we mapped out since the beginning to be able to guarantee that we would be giving taxpayers the relief we had promised, but that we were doing it in a very responsible way, without affecting the fiscal recovery that has required so much effort and sacrifice to achieve and without affecting, or affecting in the least possible, the companies that were being asked for an additional contribution,” GDB Chairman Carlos García said.
I believe that this determination of the IRS, which puts an end to challenges made by some sectors, is a great victory for Puerto Rico because we all win,” he said.

Author Details
Author Details
Business reporter with 30 years of experience writing for weekly and daily newspapers, as well as trade publications in Puerto Rico. My list of former employers includes Caribbean Business, The San Juan Star, and the Puerto Rico Daily Sun, among others. My areas of expertise include telecommunications, technology, retail, agriculture, tourism, banking and most other segments of Puerto Rico’s economy.

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