Doral takes new jab at Treasury, which stands its ground
Economist and former Clinton administration official Robert Shapiro said Tuesday the Treasury Department’s decision to nullify an agreement that would have granted Doral Financial Corp. a $230 million tax refund has “serious implications” on the potential to attract future investments, as well as on the island’s economic growth.
During a conference call, the advisor that Doral enlisted to support its fight against the decision the government made earlier this month, said the move by the Gov. García-Padilla administration will “depress growth in Puerto Rico because it will directly discourage investment from the United States and other countries, both direct and financial.”
“Lower financial investment will lead to slower growth and job creation, and it compounds all of the economic challenges that Puerto Rico finds itself confronting,” said Shapiro, during a call that attracted members of the media from local and stateside news organizations.
“Unless reversed, this measure could create significant adverse economic effects for the people of Puerto Rico,” he added.
On May 9, Doral sent a letter to Treasury late asking the agency to comply with the terms of a closing agreement reached in 2012 obligating the government to refund the bank for tax over-payments. In the letter, the bank established that it had “provided clear and uncontestable evidence of its rights under the closing agreement” to request a refund of the $230 million.
The refund had to do with a re-statement of earnings between 2002 and 2004 based on a portfolio of Interest-only strips, for which it reportedly overpaid taxes and reached an agreement with the agency to get back.
“The fact is that through this process, the Puerto Rican government really didn’t question whether Doral was entitled to this refund. They accepted that the restatement of earnings had wiped out $290M in taxable capital gains,” Shapiro said. “Doral didn’t get an immediate refund because the government wasn’t able to pay it.”
By reconsidering and changing its mind, the current administration joins a number of other governments that have backtracked on previous agreements. Argentina, for example, rescinded on its debt with bondholders and has lost its case in several courts, which have said it must meet its obligation, Shapiro said.
“If the Puerto Rico government reverses its decision, the markets will remember. Puerto Rico has had perception problems with investors in its willingness to enforce contracts, even before this,” Shapiro said. “But if this decision is reversed, it would certainly be a positive. It would show that this is a government that’s willing to listen to reason and to global markets.”
The government, he said, cannot plead “we’re spending our money on other things, so we’re not going to pay what we’re legally obliged to pay. Governments are subject to the rule of law.”
The government’s mind-change has also called the attention of regulators, namely the Federal Deposit Insurance Corp. and Puerto Rico’s Office of the Commissioner of Financial Institutions. Subsequent to entering into the 2012 agreement, Doral included Puerto Rico government tax receivables as Tier 1 capital without objection by the FDIC, which is now concerned about the bank’s liquidity.
Doral is reportedly working on a recapitalization plan, which industry sources believe calls for selling off operations in New York and Florida.
On Tuesday, the agency said it does not publicly discuss tax-related claims and disputes with taxpayers, but provided a number of arguments via a statement issued through its press office.
Regarding Shapiro’s comments, the agency said he was misinformed about the Commonwealth’s policies and account payables. Furthermore, the agency said Shapiro failed “to distinguish between a valid accounts payable of Puerto Rico and the tax related claim and dispute of one of its taxpayers.”
“The Commonwealth has a policy and on-going commitment to fulfill its contractual obligations and to defray its accounts payable as these become due. Treasury has reached the conclusion Doral’s request for a refund is not proper in law,” it said in the statement.
Among other things, the agency said Doral has not presented evidence to show that the overpayment in question ever took place.
“As previously made public by Doral, upon review of this particular closing agreement, Treasury requested Doral to provide all evidence and supporting documents that to prove that in fact Doral had overpaid taxes in connection with revenues related to the [Interest-only strips], income that according to Doral was later reversed during a restatement of the financial statements,” the agency noted.
“The evidence provided by Doral in response did not address the representations or determinations made in the closing agreement. The documentation provided by Doral only showed payments made by Doral or its affiliates during the years that were later restated, but failed to show that the payments should be refunded,” the agency said.
Among other things, Treasury said many of the checks Doral submitted as evidence were from subsidiaries unrelated to IOs income, and unrelated to the restatement of financial statements. Furthermore, the agency said at the time of the agreement in 2012, the refunds were barred by the four-year statute of limitations established under the Internal Revenue Code.
“There are no records at Treasury that show that Doral Financial Corporation, or its subsidiaries, overpaid taxes in the amount claimed,” the agency said.
“Doral’s request regarding the 2012 closing agreement is akin to taking the future depreciation of an asset and having the Treasury Department pay in the present for possible tax savings that may be obtained from that depreciation. For those tax savings to happen, Doral has to show profits in the future,” the agency further noted.
“The information that the government of Puerto Rico has is that the federal regulators decided to inform Doral that it cannot use the so called Treasury account receivable as part of its capital, because of reasons totally independent to the decisions taken by the government. Doral insists in misrepresenting this fact and many others to the market,” the agency concluded.