Tuesday, August 30, 2016


by Miriam J. Ramirez MD
Former Puerto Rico State Senator
Aug 30, 2016

The Puerto Rico economic crisis has brought Puerto Rico's economic problems to the front pages of the US and World's major newsmedia. Not a day goes by that a dozen or more articles appear in newspapers all over the world on this  topic. I never realized there were so many "experts", now offering solutions on how to solve Puerto Rico's problems! Where were they during the last century?

Our economic crisis gives us a historic opportunity to redress an injustice that was made against the US Citizens of Puerto Rico in 1921, when Congress decided to treat the territory of Puerto Rico as a "foreign country" for tax purposes. While Congress approved the 1921 exclusion in order to promote economic development, this commendable objective has not been achieved in almost a century. Puerto Rico continues to fall behind all the states in the Nation, mired in economic, social and demographic stagnation for more than a decade.   

Unfortunately, the 1921 tax exclusion that Congress established to help Puerto Rico has been transformed into a significant drain to the US Treasury, victim of well-documented transfer pricing abuses by the "Controlled-Foreign Corporations" (CFCs) in the Island. There is no economic or moral justification to allow a U.S. corporation to have tax savings of $22 million per employee in Puerto Rico.  

It is the right moment to draft legislation to finally include Puerto Rico in the U.S. tax code, with all the responsibilities and privileges of US citizens. This historic change can be achieved by deleting Section 933 of the Internal Revenue Code, and defining corporations incorporated in Puerto Rico as U.S. Corporations, for tax and other purposes. 

With Puerto Rico´s full inclusion in the tax code, Congress can stop transfer pricing abuses and create effective tax benefits that generate real jobs and promotes tangible investments in Puerto Rico through specific legislation that treat US citizens in the Island in a manner similar to other communities in the 50 states. There is a real opportunity to draft effective legislation for Puerto Rico that creates a direct link between each dollar of federal tax benefits to a job, similar to the Earned Income Tax Credit that have benefitted residents in the 50 states since 1975.  In addition, Federal tax benefits to generate real investments in Puerto Rico can be designed similar to the provisions in Enterprise Zone acts and the Promise Zones legislative proposals of President Obama.

Bringing back Puerto Rico as a full partner into the federal tax system would carry significant benefits to the People of Puerto Rico and the US Treasury, but are not possible without your strong commitment to carry them through to the final budget agreement.  As you know, there are formidable moneyed interests that benefit from using Puerto Rico as a tax heaven, and they would not give up the hugely inefficient tax deferral benefits without a fight. The almost 4 million disenfranchised US citizens in Puerto Rico count on your support to secure our equal rights and responsibilities. 


This brief describes the unexpected results of two Federal tax acts which have defined Puerto Rico´s tax identity since it became a U.S. territory in 1898.  The first law – the Revenue Act of 1921 – classified Puerto Rico as a “foreign country” for tax purposes. The second piece – the Small Business Job Protection Act of 1996 Act – eliminated the main Federal tax incentive, known as Section 936, that the U.S. Congress used to promote new manufacturing jobs and investments in Puerto Rico until 1996. 

What remained untouched after 1996 was Puerto Rico´s “foreign” tax label, which was embraced by former Section 936 firms in order to obtain the benefits of tax deferral, converting to Controlled Foreign Corporations (CFCs).  Unlike the former Section 936 program, however, the CFCs in Puerto Rico do not have to create jobs and generate real investments to benefit from tax deferral, and the U.S. Treasury does not have formal indicators to measure their cost effectiveness.  This brief takes a first step to restore accountability and transparency for the CFCs in Puerto Rico, providing the evidence to assess growing CFC Federal tax benefits at a time of decreasing jobs and investments in Puerto Rico.