By William L. Blum
Subsequent to the October, 2014 issuance of a report commissioned by Puerto Rico’s Governor Alejandro Garcia Padilla that analyzed the U.S. Commonwealth’s tax system, rumors swirled that the benefits of Puerto Rico’s unique income tax exemption system for stateside transplants, known as “Act 22,” might soon come to an end. No wonder, since the report, produced by KMPG and contracted for by Puerto Rico’s tax collection agency known as “Hacienda,” suggests that repeal of Act 22 is warranted and would simplify tax reporting and increase compliance. (Access the report at http://www.hacienda.pr.gov/sites/default/files/unified_tax_code_of_pr-_executive_summary_0.pdf).
The report also recommended that Puerto Rico Act 20, a program that encourages service business relocation to Puerto Rico in exchange for job creation and other economic benefits, should require certain minimum thresholds of activity in order to ensure that its benefits outweigh its “tax expenditure” costs.
But not so fast! According to a February 5, 2015 statement by Puerto Rico’s Secretary of Economic Development and Commerce, Alberto Baco-Bagué, “KPMG’s [Act 22 repeal] recommendation will not be adopted . . . because it is not consistent with the Commonwealth of Puerto Rico’s public policy on economic development.” The Secretary also points out that individuals who move to Puerto Rico and benefit from Act 22’s income tax exemptions nevertheless contribute substantial tax revenue to the Commonwealth based on their non-qualifying income streams and payments of other taxes.
Secretary Baco-Bagué agreed with a different finding of the report regarding Act 20 — that the incentive laws should be periodically evaluated to ensure that they are achieving their economic development purposes. But he pointed out that current Act 20 policies have for the last two years already required that participating businesses hire a minimum of three employees.
Act 20 and Act 22 have sparked great interest among U.S. taxpayers and tax planners since their enactment in January, 2012 and especially in the last two years. Act 20 offers service based businesses, including those owned by U.S. residents, a 4% tax rate, very similar to the rate offered by similar programs in the U.S. Virgin Islands and, of course, far less than stateside corporate tax rates exceeding 35%. Act 22 is unique in that it permits U.S. taxpayers who relocate to Puerto Rico to avoid U.S. and PR taxes on capital gains accrued after the move and on certain types of interest and dividend income. No other state or territory offers this type of incentive to U.S. taxpayers.
Solomon Blum Heymann LLP advises U.S. taxpayers on how to take advantage of the tax incentive programs in Puerto Rico and the U.S. Virgin Islands, including practical advice, legal opinions, and referrals to local professionals who can help taxpayers achieve very low tax rates that are not available elsewhere.