U.S. Treasury will support Puerto Rico foreign excise tax for one more year

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The United States Treasury agreed to provide support for Puerto Rico’s Act 154 tax for an additional year.

Act 154 is a 4% excise tax on the revenues of foreign corporate subsidiaries based in Puerto Rico. In 2011 U.S. Treasury agreed to a tax credit for the Act 154 payments on a temporary basis. The credit has since been extended beyond its original sunset. Puerto Rico’s Treasury Department announced on Wednesday the U.S. Treasury’s publication of a final regulation.

Puerto Rico Department of Treasury said it had made a “great achievement” in getting the U.S. Treasury to continue to accommodate Puerto Rico’s Act 154 tax.

Bloomberg News

Puerto Rico Secretary of the Treasury Francisco Parés Alicea said the U.S. Treasury’s postponement of ending the tax credit was a “great achievement” of Gov. Pedro Pierluisi and his team. Parés Alicea said it is “an important step to begin a necessary transition to bring Puerto Rico into line with the legal reality in international law matters.”

Act 154 revenues go to Puerto Rico’s General Fund, which will be used to pay general obligation and some other central government bonds once the current stay on payments is lifted.

While Puerto Rico is part of the United States, for tax purposes it is considered a foreign land.

In September 2019, then-U.S. Treasury Secretary Steve Mnuchin told Puerto Rico Gov. Wanda Vázquez Garced the federal government would take steps to end the federal tax credit that supports Puerto Rico’s Act 154 tax on foreign corporations.

Observers have worried that the loss of the federal tax credit would lead corporations to remove their operations from Puerto Rico. Many of the “foreign corporations” affected by Act 154 are companies based in the U.S.

According to Puerto Rico, 10 corporations and partnerships paid 90% of all Act 154 taxes in fiscal year 2016. The law mainly affects corporations manufacturing pharmaceuticals and other high-tech products on the island.

From July to October the Act 154 excise tax accounted for 21% of General Fund net revenues, according to the Puerto Rico Treasury.

A Puerto Rico government source said the Puerto Rico Treasury is working on creating an alternative to Act 154. The source said it may be announced in a few weeks.

The U.S. Treasury’s regulations establish new criteria for the way multinational corporations credit foreign jurisdiction tax contributions, including those paid in Puerto Rico. The regulations are partly a response to a deal reached in October by all but four of the world’s nations to impose a global minimum tax on major multinational firms.

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