Wednesday, February 13, 2013

Puerto Rico To Maintain Overseas Manufacturers' Excise Tax - Global Tax News

by Mike Godfrey,
Washington - 11 February 2013
Given the current need for additional tax revenues to cover the island’s fiscal deficit, the new Puerto Rican administration is proposing that the Law 154 excise tax on sales by the island’s manufacturers to offshore affiliates should remain in place.

In October 2010, Puerto Rico’s previous administration enacted Law 154 to establish a source income rule to determine the proportionate amount of the income derived by multinationals that should be allocated to their operations in Puerto Rico. The resulting excise tax applies to manufacturers with more than USD75m in gross receipts for any of the preceding three years.

Under Law 154 the 4% tax, effective for income accruing, and acquisitions occurring, after December 31, 2010, is being gradually reduced, to 3.75% in 2012, 2.75% in 2013, 2.5% in 2014, 2.25% in 2015 and 1% in 2016, after which it would be eliminated.

It was said that, throughout the life of the tax, it would raise almost USD6bn in revenue for the territory - a significant amount for Puerto Rico, given its current USD1bn fiscal deficit.

It has also been assumed (and not yet challenged by the Internal Revenue Service) that to avoid double taxation, US companies would be able to credit the excise tax paid in Puerto Rico against their US federal tax liability, thereby effectively shifting the burden of the tax measure onto the federal Government.

The proposed amendment would now put the excise tax back to 4% until December 31, 2017 and would, according to the Puerto Rican Treasury Department, provide additional annual revenue of USD245m.

Further to the administration’s proposal, an opposition member then introduced a bill into Puerto Rico’s House of Representatives that would impose the excise tax at a permanent level of 10% with both the Electric Power Authority and the Water and Sewer Authority each receiving 1% of the additional revenue collected, so as to reduce proposed tariff rises.

A comprehensive report in our Intelligence Report series describing how to get an optimal blend of tax-efficiency and profits from global manufacturing operations through judicious use of offshore and onshore techniques, and showing how the corporate supply chain is full of opportunities to save tax while optimising efficiency, is available in the Lowtax Library at