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Puerto Rico gov unveils proposal to reduce taxes by over $500M 

Saying that the island is “well on its way to economic recovery,” Gov. Pedro Pierluisi called it “the right time to grant these reliefs and create a much more competitive and less complex business environment, as well as provide relief to the working class.”

Proposals to reduce the tax burden by more than $500 million for individuals and corporations in Puerto Rico were revealed Monday by the island’s governor and Treasury secretary. The amendments sought also include measures to simplify the tax system.

If passed, the fiscal impact of the proposed tax changes for corporations would be about $283 million, and of some $262.5 million for individual taxpayers. 

The proposal seeks to replace “the current combined regime with a much simpler and more progressive regime starting at a rate of 17% for companies with net income of up to $275,000. For businesses with income from $275,001 to $3 million, a rate of 27% is proposed, which represents a reduction of 10.5% in the tax rate. Finally, those businesses with income greater than $3 million would be subject to a maximum rate of 33%,” explains a news release issued Monday by the governor’s office, La Fortaleza.

Corporations are currently subject to a marginal tax rate of 37.5%, which is made up of a fixed normal tax rate of 18.5%, and an additional marginal tax rate up to 19%. 

In the release, Pierluisi pointed out that of the island’s “53,000 corporate taxpayers, only 27,411 (or 51.7%) have tax liability,” and that under the proposal, about “23,747 corporate taxpayers would pay a maximum rate of 27%, which would be at a tax rate similar to the median and the average at the national level.”

The governor said the “maximum rate of 33% that we propose represents a reduction of 4.5%, compared to the current rate. But the maximum rate of 27% that would apply to small and medium businesses represents a reduction of 10.5% compared to the current rate.”

Among the other measures proposed is to eliminate the the sales and use tax, or IVU by its Spanish acronym, on the “import and purchase of inventory for resale,” which La Fortaleza called moving from what operates like “a system of credits in the IVU payroll” to “an exemption system.”

Pierluisi said the change would essentially eliminate the Value Added Tax “features that our current system has and brings us closer to being able to achieve a pure sales tax system.”

The new exemption system would entail a mechanism for reporting “inventory sales to resellers and create a digital Exemption Certificate for merchants who import or purchase inventory for resale,” the governor said.

Individual taxpayers
Meanwhile, the proposal for individual tax filers is to have the maximum rate paid reduced from 33% to 30%. 

“The top rate at the federal level in the United States is 37% and the median rate at the global level is 30%, so the proposal puts us in a much less onerous position than it currently is,” according to the release.

Currently taxed at a rate of 25%, people earning $41,500 to $61,500 would see their rate lowered to 24% under the proposal, which includes expanding said tax bracket to earners of up to $81,500.

“This is important since, currently, the maximum rate of 33% applies to people with incomes of $61,500 or more,” the governor said. “The 24% rate will apply to income from $41,500 to $81,500, which could mean a 7% reduction for some taxpayers and, consequently, a great tax relief for the working class who did not benefit from the Work Credit.” 

The release adds that the 5% and 3% discounts established by Act 257-2018 and Act 40-2020, respectively, for taxpayers with incomes of $100,000 or less, are kept. And people aged 65 or older would get a $400 credit, “thus eliminating the condition of exceeding certain revenue figures to pay the additional $200.”

Pierluisi said the bills will be introduced by the end of this month because the federally established Financial Oversight and Management Board for the island requires studies on the impact of the proposals.

“The Fiscal Agency and Financial Advisory Authority (AAFAF) and the Department of the Treasury are collaborating in the preparation of an economic study on the impact of these tax proposals on our economic development and the changes in behavior of our individual and corporate taxpayers,” the governor said in a news release issued by his office, La Fortaleza. “This study, which should be ready in the coming weeks, aims to report the short, medium, and long-term impact of our proposals to ensure that they are viable and positive for Puerto Rico. It will be shared with the Legislature when we introduce the bills, as well as with the Fiscal Oversight Board, with whose staff we have already had informal discussions.”

Secretary Parés was quoted as saying: “Our mission is to continue simplifying the tax system so that citizens of all sectors benefit. The effectiveness of the Department’s measures have been reflected in the net revenues to the General Fund for the past five years, which have consistently exceeded the Fiscal Plan projections certified by the Fiscal Oversight Board.”

The trend, La Fortaleza added, “suggests that General Fund revenues will remain at a level similar to that of the past two fiscal years.”

The Treasury secretary explained that since the average excess revenue compared with projections is of about $790 million, “this tax relief will have the effect of redistributing the tax burden of individuals and corporations by more than $500 million.”

The proposed measures were said to come from “the work and recommendations of the Advisory Group to simplify and improve the tax system of Puerto Rico, created by the governor in October 2021.” 

According to the release, the measures:

– Simplify compliance with informative returns and income tax return requirements.

– Consolidate or eliminate the filing of annual reports to different government agencies.

– Combines expiration dates of payrolls (state and municipal) and annual reports.

– Establish a simple and agile alternative so that bona fide farmers can take advantage of the benefits of the Incentives Code.

Pierluisi said his “vision for the future of Puerto Rico includes that our island be a jurisdiction with low taxes and easy compliance with tax liability, so that we can compete favorably with other states and territories, as well as with other parts of the world by attracting population, commercial activity and capital investment.” 

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This story was written by our staff based on a press release.

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