The new tax bill adds more damage to hurricane-battered Puerto Rico. If Hurricane Maria did not finish off Puerto Rico, then this bill will ensure that the devastated economy will be further decimated.
The problem with Puerto Rico is that it’s foreign in a domestic sense. The U.S. tax code treats Puerto Rico as a foreign jurisdiction for tax purposes. So corporations formed in Puerto Rico are treated as foreign corporations, and income derived from Puerto Rico is ordinarily treated as foreign source income. Prior to the tax bill, that status could have been advantageous for companies. Now they’ll have to think twice about locating their business in Puerto Rico, as the tax bill includes a new 12.5 percent tax on profits derived from intellectual property held by foreign companies. Indeed, this may compel corporations to leave Puerto Rico and move their businesses overseas. Particularly, pharmaceutical and medical device industries, which represent a big chunk of employment in Puerto Rico.
Adding another blow to the Puerto Rican economy is another new tax written into the bill, which imposes a tax on products made in Puerto Rico and exported to the United States. Puerto Rican products will now be subject to a 20 percent tax on goods, coming into the United States—its major export market since they are unable to fully participate in the global arena by being a territory.
Let’s not forget the Jones Act (my previous post), which imposes a 40 percent markup on products coming into Puerto Rico, and restricts foreign shippers. The language of convenience strikes again — the new tax bill cements Puerto Rico as foreign, yet in that same vein, foreign vessels are not allowed to ship directly to Puerto Rico. If that doesn’t scream colonialism, I don’t know what does. Simply put, Puerto Rico is screwed.