The Ministry of Economic Development (DDEC by its Spanish acronym) remains solid in its support for Laws 20/22, two incentive laws that have created some controversy, in part because of claims that they did not generate the expected investments or job creation on the island .
“Studies have shown that these laws have had a positive impact on Puerto Rico’s economy. They provide economic activity that we may not otherwise get. Repealing these laws would create the false impression that Puerto Rico is not open for business, ”said Carlos Fontán, executive director of DDEC’s Office of Business Incentives. He testified during a Senate Finance Committee hearing on the matter earlier this week.
Law 20 provides incentives for the export of services that include a fixed tax rate of 4 percent. The business areas eligible for funding include research and development; Advertising and public relations; and advice in the fields of business, environment, technology, science, management, marketing, human resources, computers and auditing. The goal of Act 20 is to develop Puerto Rico as an international export services center and to diversify the drivers of economic growth by encouraging local service providers to expand their services outside of Puerto Rico and attracting new businesses to Puerto Rico.
Act 22, meanwhile, provides exemptions from passive income and capital gains tax for wealthy individuals moving to the island. According to the law, capital gains are also exempt from federal tax. Law 22 aims to attract new residents to Puerto Rico by providing complete exemption from Puerto Rico income tax on any passive income realized or accrued after those individuals became bona fide Puerto Rico residents. “This shift should result in new local investments in real estate, services and other consumer goods, as well as capital injections into the Puerto Rico banking sector, all of which will fuel the Puerto Rico economy,” said DDEC.
Nine years after the measures to stimulate export services (Law 20) and the arrival of wealthy investors in Puerto Rico (Law 22) were passed, lawmakers are considering their possible repeal or amendment, while the executive continues to defend both laws, arguing that they are local Economy and that removing them would create a “legal limbo”.
The Senate Finance Committee, chaired by Senator Juan Zaragoza of the People’s Democratic Party, held a public hearing on Monday on Senate Bill 40 proposing the repeal of Laws 20 and 22.
During the hearing there was a heated debate on the subject between Zaragoza, a former finance minister of Puerto Rico, and Fontán. “This Law 22 thing out there is messed up, but so messed up that you know there’s a – no longer so reputable – accounting firm whose founding partners are on trial in federal court; one of them accused of fraud” Laws 20 and 22 that actively promoted these systems among their customers, “explained Zaragoza.
Legal Limbo Warnings
However, Fontán confirmed that the federal fraud case against CPA Gabriel F. Hernández, a partner in the now-defunct BDO Puerto Rico firm, cannot be generalized and assured that he knows of other Act 22 firms and beneficiaries who are responsible and are following those Conditions of the Tax Exemption Act. Fontán also argued that repealing both statutes would create legal limbo.
“If the laws are repealed, you create a legal limbo for me because how do I proceed to repeal a (tax exemption) regulation if the regulation to which it relates belongs to a law that has been repealed? this is why incentive laws are not historically repealed, “said the DDEC official.
In response, New Progressive Party Senator Migdalia Padilla indicated that the incentive laws can be changed. “The word repeal is serious. Now we can give him some claws, “she said.
Speak with THE WEEKLY JOURNAL, Zaragoza agreed to the possibility of amending Law 22 by creating another bill. “Act 22 has its results, but Act 22 has its weaknesses. But given the appetite of certain people to come to Puerto Rico, it remains to be seen if the investment requirements can be increased,” he said.
DDEC Legal Services Director Carlos Ríos said repealing both laws would create the false impression that Puerto Rico is not open for business. “It’s an economic activity that would hardly take place without the incentives offered,” he argued.
Latest study on Acts 20/22
According to the latest study commissioned by DDEC, the two incentive laws created an estimated 33,000 new jobs in Puerto Rico between 2012 and 2017, which helped increase Puerto Rico’s employment rate by 3 percent and total production by 2 percent. Without these incentive laws, the island’s Economic Activity Index would supposedly have been 2.64 points lower.
In 2017, 1,332 people and their families lived in Puerto Rico with decrees under Law 22 and another 781 decrees under Law 20. The number of decree holders has continued to grow in recent years, although there was a “pause” in 2020 due to the COVID-19 pandemic. However, in recent months, 579 additional decrees have been approved for Act 20 and another 710 for Act 20.
The study was carried out by Econometrika Corp. conducted by economist José Caraballo Cueto, who is also a professor at the Cayey campus of the University of Puerto Rico.
“We do not recommend the abolition of Acts 20, 22 and 273” [on tax incentives for international banking activities]. Rather, we recommend revising them to maximize their potential, ”the study says.
The revision of these incentive laws includes the conditioning of participation in the creation of at least 10 new jobs in Puerto Rico, the introduction of a minimum capital gains tax of 12 percent for enactments of Law 22, an increase in property tax on luxury properties, which are generally defined as real estate within the top 10 percent of the local market.
Additionally, in order to encourage economic activity, the study states that Act 22 decrees should not be passed on to those who do not wish to do business in Puerto Rico, have net worth less than $ 10 million or less than $ 25 percent of their capital would be transferred to the island.
Many Act 20 decree holders live in Dorado, Condado, Old San Juan, and the study shows that buying real estate, whether for primary or secondary residence, shouldn’t be one of those people’s investment needs.
In addition, the study recommends improving the monitoring of the decree holders, which has been sluggish for several years. For example, regulation holders are required to file Tax Forms 1040R and 940R each year to update their financial situation, including reporting labor costs.
In response, Fontán noted that DDEC has improved compliance efforts and to date has identified 1,086 regulation holders who have been notified of possible non-compliance on various matters. Specifically, more than 60 decrees are now being examined for a possible revocation.
“We are starting to be stricter in evaluating incentives to ensure that the applications we approve represent the best interests of Puerto Rico,” he added.
Protests against the incentive laws
When the debate erupted during the legislature hearing, protests were held outside the Capitol to demand the repeal of both laws. Diego Norat, a youth spokesman for the Puerto Rican Independence Party, said the laws “create tax apartheid in our country,” adding that they also “displace our people, impoverish our communities and are detrimental to full economic development. “
Likewise, Joselyn Velázquez, a spokeswoman for Jornada Se Acabaron Las Promesas (“The time that promises are over”) said that “the claim is very simple – these laws need to be repealed because if a project doesn’t work, it has to be eliminated it must be removed. “
– Reporter Yaritza Rivera Clemente contributed to this story.