Study: Global minimum tax could generate $3.8B annually for Puerto Rico
Espacios Abiertos emphasizes the potential economic impact starting in 2025.
The adoption of the global minimum tax (GMT) has the potential to generate up to $3.8 billion annually for Puerto Rico, according to a study by the nonprofit Espacios Abiertos (EA), also known as Open Spaces. The government transparency watchdog noted that this amount is equivalent to one-third of the island’s general fund budget and could significantly boost the island’s economy if “well invested.”
The study evaluates the effects of the 15% GMT in Puerto Rico, highlighting both opportunities and risks. It says that the digitization and globalization of the economy have allowed multinationals to shift profits to low-tax jurisdictions, resulting in significant global tax revenue losses. Consequently, more than 140 economies have cooperated to implement a GMT to ensure equitable taxation and sufficient funding for essential public services.
The EA report, “Global Minimum Tax and its Potential Effects in Puerto Rico: A Window of Opportunity,” aims to make information accessible, provide knowledge and data, and promote an open discussion for Puerto Ricans to take advantage of the GMT’s opportunities, mitigate risks, and ensure sustainable fiscal policy.
Starting in 2025, the GMT will affect subsidiaries in Puerto Rico whose parent companies have another subsidiary in countries that have signed the agreement promoted by the Organization for Economic Cooperation and Development and the G20 group of industrialized nations.
Currently, multinational and foreign corporations in Puerto Rico pay an effective tax rate of 2.43%.
The Income Inclusion Rule and the Undertaxed Profits Rule allow any signatory country to claim the difference up to the 15% rate from jurisdictions that have not adopted the GMT, starting in January. For Puerto Rico, this difference amounts to 12.57%.
“It is for that reason that it is imperative to adopt legislation that allows Puerto Rico to capture that money, which would otherwise go to the coffers of other countries,” said the economist Daniel Santamaría-Ots, who is EA’s research director.
“We are talking about a significant amount. That’s more than $3.5 billion that others could claim. What we have in front of us is not whether the tax rate for these corporations is increased here, because they will have to pay 15% here or abroad. The issue to be defined is who will collect that money? If we don’t do anything, it will be collected by the country of origin or the country of some affiliate, but if we want it to stay in Puerto Rico, we have to take action,” the director said.
“Once legislation is passed to ensure that these new revenues stay in Puerto Rico, the next question is how and where that money will be invested,” said Santamaría-Ots. “The alternatives for using the funds generated by the GMT are vast, as vast as our imaginations allow.”
The economist summarized the report’s findings in three areas:
- Revenue collection: Implementing the Qualified Domestic Minimum Top-up Tax (QDMTT) could yield up to $3.8 billion annually. Without it, other jurisdictions could claim up to $3.56 billion, leading to a significant loss for Puerto Rico.
- Public policy: Puerto Rico must determine how to allocate these additional revenues, balancing nontax incentives and other budgetary priorities.
- Long-term adaptation: Puerto Rico needs a long-term strategy combining nontax incentives with policies promoting investment in alternative real economic activities for sustainable economic and fiscal health.
The report’s recommendations include obtaining an official opinion on the compliance of the Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two)in Puerto Rico, evaluating adherence to the Base Erosion and Profit Shifting inclusive framework, and deciding on the implementation of Pillar Two before 2025.
It also suggests enacting legislation on the GMT and GloBE Rules before the end of 2024 and establishing an independent commission to analyze the GMT’s impact in Puerto Rico.
