Puerto Rico manufacturing still threatened

Washington - Last night, after hours of uncertainty and moves, Senate Republicans approved their federal tax reform bill, as part of legislation that would have withheld all new taxes on foreign companies that the island's authorities insist represent a fatal blow to the manufacturing sector of Puerto Rico.

A total of 51 Republicans voted in favor of the legislation. Bob Corker (Tennessee) was the only Republican who opposed the measure, as did the entire Democratic caucus, with 48 senators.

The bill, commanded by the chairman of the Senate Committee on Finance, Orrin Hatch, now goes to a conference committee with the House of Representatives, where a group of senators and members of Congress will seek to harmonize the bills approved by each legislative body.

The authorities of the island hope to insert, in that conference committee, amendments that exclude or reduce the effect on Puerto Rico of the new taxes proposed for the Corporations of Foreign Control (CFCs), which include from a minimum tax rate –which does not exist now- to taxes for products manufactured in the island and then sold to their parent companies in the United States.

CFC companies in Puerto Rico -mainly pharmaceutical and medical equipment manufacturers-, account for just over half of the approximately 73,000 employees in the manufacturing industry and it is estimated that they are related to about one third of the revenues of the Puerto Rican government. .

Through the tax treatment that CFCs receive, which sheltered about 40 companies after the elimination of section 936 of the federal Internal Revenue Code, companies can keep their income out of the hands of the federal treasury if they are reinvested them in abroad.

An amendment recommended by Democrats Bill Nelson (Florida) and Robert Menéndez (New Jersey) aimed at excluding Puerto Rico from changes in the tax treatment for CFCs never came to be formally debated in plenary.

The amendment proposed would have restrained the taxes of the tax reform bill on CFCs on the island until "all bona fide residents of Puerto Rico are treated in the same way as residents of the 50 states" under the federal Internal Revenue Code.

Nelson and Méndez´s proposal coincides with the claims made by the government of Puerto Rico, the private sector, and the Popular Democratic Party - including former governors Alejandro García Padilla and Aníbal Acevedo Vilá.

Meanwhile, Resident Commissioner Jenniffer Gonzalez, who sees the best opportunities from her Republican caucus in the lower house on the conference committee, has insisted that there are no opportunities for a total exemption for Puerto Rico's CFCs.

García Padilla met with Senator Nelson on Wednesday. And former governor Acevedo Vilá went to Senator Menéndez on Tuesday to press his Republican colleague Marco Rubio (Florida), who, like the Democrat for New Jersey, is Cuban-American.

Nelson and Menéndez submitted their amendment on Thursday night. On Wednesday, in a message in the hemicycle, Nelson said that "we are going to send another hurricane to Puerto Rico if we approve this bill, due to the sections of this tax bill that are punitive for Puerto Rico."

In his statement on Wednesday, as he did during the voting session on November 16 in the Committee on Finance, Nelson only referred to tax measures that tend to be extended -from time to time - such as the increase in the reimbursement for the federal tax to imported rum and the temporary reduction in the rate of US domestic companies that do business on the island - but that do not constitute the main defense that the island´s authorities want against the federal tax reform.

Without embracing it as an alternative, to the surprise of some in Congress, the government of Ricardo Rosselló limited to thanking the senators for their proposed amendment. "We thank both senators, Nelson and Menéndez for their constant support and for having the interests of Puerto Rico present," said the director of the Puerto Rico Administration of Federal Affairs (PRFAA), Carlos Mercader.

Former governors Acevedo Vilá and García Padilla have considered that the Nelson-Menéndez amendment could serve as a pressure on Senator Rubio, the Republican with the largest number of Puerto Rican voters in his state.

The governor's representative in Washington indicated in a written statement that they place their attention on the Republicans. "This project is one that only Republicans are supporting and in that sense we continue to promote the proposal of the Government of Puerto Rico to be included in the tax reform, which is the only viable option that allows us to protect our tax base and seek to be included as jurisdiction within the United States, "Mercader said.

Internal Struggle

In the last few hours, senators Ron Johnson (Wisconsin), Jeff Flake (Arizona), Steve Daines (Montana) and Susan Collins (Maine), who were undecided, announced their support for the legislation, a sight of relief to the majority leader Mitch McConnell (Kentucky) and President Donald Trump, eager for a legislative victory before Christmas.

In order to ensure the bill approval, the Republican leadership had to make last-minute changes, which the Democrats considered a product of "lobbyists."

Republicans have 52 of the 100 seats in the Senate. Because it was added to a project of fiscal reconciliation, the tax reform required the support of 51, not the traditional super majority of 60 that forces the majority to approach the minority.

A handful of Republican senators were reluctant to support the legislation, especially after the Joint Committee on Taxation informed that the measure - with a cost of $ 1.5 trillion (trillion) over the next decade - will increase in $ 1 trillion the federal deficit, an issue that creates waves among conservatives.

On one hand, Senator Johnson made changes to the differences in the contribution of the owners of companies that are taxed as a corporation and those that do it as individuals. Collins managed to increase the deductions for individuals in the US to $ 10,000 for property taxes paid at  state and local level.

Senator Corker (Tennessee) voted against it after failing to convince the leadership to include an amendment to revise the tax rates reduced in the bill, if the projection of the legislation is not achieved.

Corker - who retires in 2018 and has had ongoing clashes with President Trump - has been particularly concerned with the increase in the fiscal deficit at a time when the US public debt is about $ 20 trillion (trillions).

"Senate Republicans agreed to make history and move forward with a general review of taxes, which will generate more income, more jobs, higher wages and more opportunities for all Americans," Senator Hatch said.

For the leader of the Senate Democratic minority, Charles Schumer (New York), in his long career in politics, “I have not seen a more regressive legislation, so lacking in logic, so inadequate for the condition of the country, so far from the reality of what the American people need. "

The legislation, consistent with the public policy of economic nationalism of President Trump, reduces the tax rate of US domestic corporations from 35 percent to 20 percent, with the hope that, together with the new taxes on CFCs, the return to the US states of companies in foreign jurisdictions will be encouraged.

In the lower house, the main objective of the government and the private sector is to exclude the island or reduce the proposed 20 percent tax rate boosted by the Republican majority for products manufactured by the CFCs that are acquired by their parent companies in USA

This amendment is considered the most disadvantageous for Puerto Rico, since the overwhelming majority of exports of CFCs on the island go to the United States, which is not usually the case of the main competitors of the island in other countries, such as Singapore and Ireland. Moreover, at a time when Congress seeks to  tremendously reduce the taxes paid by domestic companies in the US.

In the Senate, the main attention of the representatives of the island continues in the tax of 12.5 percent for intangible assets - intellectual property, such as patents, trademarks and technological developments-, of the CFCs.

Both in the House and the Senate - without the support of the commissioner - Governor Rosselló, the leadership of the PPD and private industry are calling for the exclusion of Puerto Rico from any global minimum tax rate for companies used to to keeping their profits abroad.

This week, however, the commissioner joined the claims for Puerto Rico to obtain preferential treatment at the tax rate imposed for the mandatory repatriation of profits obtained prior to the approval of the legislation. That issue was excluded from the last language circulated by the governor and the private sector.

Commissioner Gonzalez, who strongly defends new loans for investment on the island through the program of economic development zones, has foreseen that the conference with the Senate will begin early next week.