The Puerto Rican government’s proposal to eliminate the business-to-business sales tax exemption is a bad idea and does not guarantee the $800 million in new revenue Gov. García-Padilla’s administration has predicted, because oversight and collections related to these transactions is a difficult task to achieve, Economist José J. Villamil said Thursday.
Still, the government is in a situation “in which it doesn’t have too many options,” and must generate enough revenue to satisfy credit ratings agencies that are monitoring Puerto Rico’s fiscal situation closely.
“We’ll have to wait and see what kind of changes the proposal goes through in the legislature, and what lawmakers need to be careful about is that changes don’t result in such a drastic reduction in government revenue that it falls short of credit ratings agency expectations,” said Villamil. “The risk of a [credit] degradation is immense and imminent.”
Villamil shared his insight with a roomful of developers gathered for an event sponsored by the Puerto Rico Homebuilders Association, to discuss the promotion and development of safe and adequate housing for island families. Among other issues, industry professionals and government representatives discussed the challenges to achieving enough and appropriate housing, including cost considerations.
“Some in government are saying that eliminating the B2B sales tax exemption is basically an extension of the sales and use tax. But the truth is that this is a new tax that will impact the transaction costs of businesses and can lead to negative consequences, particularly in companies that are in an industry where margins are low,” Villamil said.
Furthermore, adding “another level of complexity” to an already costly and complicated tax system could further lift Puerto Rico’s standing as one of the world’s most taxed jurisdictions.
According to the “Paying Taxes 2013” study by Price Waterhouse Coopers and the World Bank Group, Puerto Rico ranks 104th out of 185 economies with the highest numbers of tax requirements for companies wanting to do business.
“Puerto Rico’s ranking suggests that the tax system must be simplified and not made more complex, which is what would happen if sales tax is applied to B2B transactions,” Villamil said.
Costs are a challenge
As it relates to construction, eliminating the B2B exemption could increase the cost of building a home by between 4 percent and 6 percent per unit, Villamil said.
That in itself poses a challenge to homebuilders, who in recent years have had to modify their blueprints to be able to develop or finish housing projects throughout Puerto Rico.Rafael Rojo (Credit: © Mauricio Pascual)
Developer Rafael Rojo, who spoke of several of the housing projects he has either developed or has in the pipeline, explained that when all is said and done, 14 percent of the cost of building affordable housing units are government-imposed expenses.
“The challenge we have is to build homes within acceptable cost structures and within the legal framework so that clients can buy those homes,” Rojo said. “There is a high demand for housing, but we need support to be able to fill that need.”
Meanwhile, Alejandro Brito, president of the trade group known as ACH, said the sector is facing other challenges as well, including a weak and limited rental market, would-be home buyers with limited savings and high indebtedness, obsolete laws and burdensome taxes, particularly for multifamily dwellings.
Some 2,320 new homes were sold in Puerto Rico last year, and so far this year, the monthly levels have been “almost at the same as we sold in a single week several years ago,” Brito said.
“We’re a very bad levels, compounded by the fact that the government’s housing incentive came to an end last year, so average home prices have increased,” he said.
Average home prices in Puerto Rico were about $190,000 in January, which jumped to $226,821 in February, $258,123 in March, and $231,419 last month. That figures include all price ranges, from the ultra-luxe to social interest dwellings, he said.
Finally, he said that the construction sector also has to address a new reality for housing, which basically requires one-bedroom, lower-priced dwellings that respond to the needs of a smaller family. Furthermore, the government needs to change its focus on trying to repopulate urban centers, when the most incentives available in the market provide for buying dwellings in rural areas, Brito said.