A Constitutional and Technical Analysis: The Imposition of Puerto Rico's Excise Tax on the Manufacturing Industry

Author:Ana Delia Montañez Morales
Position:Certified Public Accountant
Pages:243-264
 
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A CONSTITUTIONAL AND TECHNICAL ANALYSIS:
THE IMPOSITION OF PUERTO RICO'S EXCISE TAX ON THE
MANUFACTURING INDUSTRY
ANA DELIA MONTAÑEZ MORALES*
I. Introduction ..................................................................................................................... 243
II. The Manufacturing Industry in Puerto Rico ....................................................... 244
III. Puerto Rico Tax Incentives ....................................................................................... 246
IV. Puerto Rico Act 154: Overview ............................................................................... 246
A. Approval of the Internal Revenue Code for a New Puerto Rico .............. 247
B. Effectively Connected Income Rules .................................................................. 248
C. Excise Tax ..................................................................................................................... 249
V. Manufacturing Industry Perspective ..................................................................... 251
VI. Creditability of Excise Tax ........................................................................................ 253
VII. Constitutional Aspects of Excise Tax ................................................................... 258
A. Export Taxes Prohibition ....................................................................................... 258
B. Due Process and the Privileges and Immunities Clause ............................ 259
C. Commerce Clause ...................................................................................................... 261
VIII. Conclusion .................................................................................................................... 262
No government can exist without taxation …
the grand art consists of levying so as not to oppress.”
Frederick the Great
18th Century Prussian King
I. INTRODUCTION
A tax is a “compulsory monetary contribution to the state's revenue,
assessed and imposed by a government on the activities, enjoyment,
expenditure, income, occupation, privilege, property, etc., of individuals and
organizations.”
1
Taxes are used as tools for economic and social policies.
Their main purposes are to generate income, encourage or discourage
certain types of activities, redistribution of wealth, a nd economic control. An
effective tax system must generate steady stream of government revenue,
ensure fairness, be administratively feasible, and neutral.
* Certified Public Accountant; Tax Senior working for Deloitte Tax LLP in San Juan, Puerto
Rico and fourth year student at the University of Puerto Rico Law School.
1
Tax Definition, WebFinance, Inc., http://www.businessdictionary.com/definition/tax.html
(last visited: Nov. 15, 2011).
244
U.P.R. Business Law Journal
Vol. 2
The taxing power of Puerto Rico arises in Article 6, Section 2 of the
Constitution.
The power of the Commonwealth of Puerto Rico to im pose and
collect taxes and to authorize their imposition and collection by
municipalities shall be exercised as determined by the Legislative
Assembly and shall never be surrendered or suspended.
2
The rule of taxation in Puerto Rico shall be uniform
3
and shall
originate in the House of Representatives, but the Senate may propose or
concur with amendments as on other bills. The taxing power of the
Commonwealth of Puerto Rico is exercised through the Internal Revenue
Code, which embodies domestic statutory tax law.
In fact, on October 25, 2010 the governor of Puerto Rico enacted Act
No. 154
4
, which amends several provisions of the Internal Revenue Code. The
Act modifies the sourcing rules to treat certain nonresident alien individuals
and foreign entities as engaged in a trade or business within Puerto Rico. It
also sets forth a new excise tax on the acquisition of personal property
manufactured in Puerto Rico and services related to the manufacturing of
tangible property. In particular, throughout this paper I will examine the
industry perspective towards the excise tax, evaluate its creditability as a
foreign tax in other jurisdictions and analyze some constitutional aspects
related to the imposition of the excise tax.
II. THE MANUFACTURING INDUSTRY IN PUERTO RICO
Since the 1950s, American pharmaceutical companies have invested
heavily in Puerto Rico, encouraged by duty free access to the United States
and tax incentives. As a result, the pharmaceutical industry has become one
of the leading manufacturing industries in Puerto Rico. This industry has
improved Puerto Rico’s economy by helping to exponentially increase its
exports and imports between fiscal years 1987 and 1997.
5
The Commonwealth of Puerto Rico has a unique political and
economic relationship with the United States which has allowed companies
to manufacture products free from the Federal Income Tax imposed in the
2
P.R. CONST. Art. VI § 2.
3
P.R. CONST. Art. VI § 3.
4
Act to Amend Section 1123 and add a new Chapter 7 to Subtitle B “Excise Tax”, to Act No.
20 of 1994: Internal Revenue Code of Puerto Rico of 1994, Act No. 154 of Octo ber 25, 2010,
P.R. LAWS ANN. tit. 13 § 8523, §§9085-89 (2010).
5
WELCOME TO PUERTO RICO, Economy; http://www.topuertorico.org/economy.shtml (last
visited: Nov. 15, 2011).

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