Puerto Rico Act 154: The Beginning of the End? Effects of Act 154 on Future Economic Development

Author:Felipe Rodríguez Lafontaine
Position:Certified Public Accountant
Pages:216-241
 
FREE EXCERPT
PUERTO RICO ACT 154:
THE BEGINNING OF THE END?
EFFECTS OF ACT 154 ON FUTURE ECONOMIC DEVELOPMENT
ARTI CLE
FELIPE RODRÍGUEZ LAFONTAINE*
I. Introduction ...................................................................................................................... 217
A. Puerto Rico’s Primary Taxing Power: The Fiscal Autonomy of the Island
............................................................................................................................................... 218
B. Puerto Rico and Industrial Development Incentives: Past and Present 221
II. General Background Information: International Taxation ............................ 223
III. Puerto Rico Act 154 ..................................................................................................... 224
A. Alternatives Analyzed .............................................................................................. 224
B. The Approval Process and Immediate Concerns ........................................... 226
C. Technical Aspects: Discussion of the Mechanics of Act 154 ...................... 229
1. Approval of the Internal Revenue Code for a New Puerto Rico ........... 229
2. Modified Effectively Connected Income and Source Rule ...................... 230
3. Excise Tax on the Acquisition of Property and Services from Related
Parties ............................................................................................................................. 233
4. Relevant Concepts found in the Regulations applicable to the Excise
Tax .................................................................................................................................... 234
5. Creditability of Act 154 Excise Tax ................................................................. 237
D. Unanswered Concerns: The “Twilight Zones” in Act 154 .......................... 237
IV. Conclusions: Are We at the Border of the Cliff? ................................................ 240
I am pleased to announce our plan to fulfill the promise that
we made you of a tax reform that leaves you with More Money
in Your Pockets . . . that gives a real tax relief to all and every
single Puerto Rican . . . that rewards our workers . . . and
stimulates savings and job c reation.
The tax reform that will be presented . . . is, without a
doubt, the largest, most comprehensive, fairest and that
returns the most money to the pockets of our people, in all of
our history. Because as we said before and proudly repeat
today: 'a dollar in your hands yields much more than a dollar
in the government’s hands'.
* Certified Public Accountant; Tax Senior working for Deloitte Tax LLP in San Juan, Puerto
Rico and J.D. Candidate, University of Pue rto Rico Law School, 2012.
No. 2 Puerto Rico Act 154: The Beginning of the End? 217
Governor of the Commonwealth of Puerto Rico, Luis G.
Fortuño1
Good friend, this event (Act 154), may be the last nail in the
coffin.
Email by an anonymous top executive of the pharmaceutical
industry2
I. INTRODUCTION
When the Governor of Puerto Rico, Luis G. Fortuño, pronounced the
above-mentioned statementgiven during his special message before a joint
session of the Puerto Rico Senate and House of Representatives on October
25, 2010he conveniently failed to mention which would be the revenue
source that would be implemented to finance this new tax reform. However,
just a couple of hours before announcing this new tax reform, the Governor
had enacted into law Puerto Rico Act 154 of 2010 (hereinafter Act 154),3
which modified several provisions of the Puerto Rico Internal Revenue Code
of 19944 with the purpose of increasing income tax revenues. In
contraposition, when the Governor expressed his view, he basically summed
the worst fears of the manufacturing industry in Puerto Rico. Therefore, the
wise words of Benjamin Franklin couldn’t have had more relevance: “in the
world nothing can be said to be certain except death and taxes.5
In summary, Act 154 modified the source of income rules in order to
treat certain non-resident alien individuals, foreign corporations or
partnerships as engaged in trade or business within Puerto Rico in order to
tax them on certain transactions.6 Act 154 also enacted a new excise tax on
the acquisition of personal property and services. This article studies the
technical aspects and effects of Act 154 on the tax incentives scheme that
1 LUIS G. FORTUÑO, GOVERNOR OF THE COMMONWEALTH OF PUERTO RICO, Mensaje Especial sobre La
Reforma Contributiva, Salud para Todos y Más Dinero en tu Bolsillo [Special message
regarding the Tax Reform, Healthcare for All and More Money in your Pockets], October 25,
2010, http://www.fortaleza.gobierno.pr/mensaje_gobernador/pdf/mensaje.pdf.
2 Joanisabel González, Píldora que atraganta la economía (The Pill that Chokes the Economy), EL
NUEVO DIA, October 31, 2010,
http://www.elnuevodia.com/Xstatic/endi/template/imprimir.aspx?id=808566&t=3
(informing about the general provisions of PR Act 154, the lack of transparency in the approval
process and the general discontent amongst the manufacturers in Puerto Rico).
3 2010 P.R. Laws No. 154; as amended by 2010 P.R. Laws No. 157.
4 P.R. LAWS ANN. tit.13 § 8006 §§ 9750 (LexisNexis 2007).
5 BENJAMIN FRANKLIN, LE TTER TO JEAN-BAPTISTE LEROY (Nov. 13, 1789) available at
http://www.scmidnightflyer.com/benf.html.
6 2010 P.R. Laws No. 154.

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