Congressional Democrats on Friday took aim at Puerto Rico’s role as a tax haven, asking the U.S. Treasury to investigate if the struggling island is helping the wealthy dodge federal and state taxes with little apparent benefit to the local economy.
In a letter to Treasury Secretary Steven Mnuchin, four representatives asked for information regarding two Puerto Rican tax incentives, Acts 20 and 22, that were passed in 2012 with the goal of luring wealthy individuals and service-providing companies to the island.
Beneficiaries of the measures pay virtually no local income tax if they reside in Puerto Rico at least half the year; in addition, most Puerto Rican residents are exempt from federal income tax.
The laws have “enabled high-income individuals and profitable service businesses to avoid any Federal or territorial taxation on some income and to owe extremely low rates of tax on other income,” the lawmakers wrote. “By ‘residing’ on the island for 183 days per year, these individuals now avoid both Federal and local taxes. This results in tax benefits that individuals and businesses could not obtain anywhere else in the world. In other words, Puerto Rico has become a tax haven from the Federal government.”
The letter was signed by Representatives José E. Serrano, Nydia M. Velázquez, Raúl M. Grijalva, and Alexandria Ocasio-Cortez.
“Acts 20 and 22 have turned Puerto Rico into a tax haven with little to no benefit for the vast majority of Puerto Ricans,” Rep. Serrano (D-NY) said in a statement. “The Department of the Treasury should conduct greater oversight over how these tax breaks are being implemented and their impact on federal, state, local, and territorial tax revenues. Puerto Ricans need greater transparency and accountability regarding these choices.”
Puerto Rico, a U.S. territory of 3.2 million, is staggering under more than $70 billion in debt and has been caught in a decade-long recession. The economic malaise, particularly in the wake of Hurricane Maria in 2017, has led to an exodus from the island.
When they were rolled out in 2012, the tax incentives were seen as a way to attract companies and individuals who might create jobs on the island, where unemployment is running about twice the national average.
According to a report issued by Puerto Rico’s Department of Economic Development and Trade, 2,202 individuals have moved to Puerto Rico to take advantage of Act 22. Of those, 1,233 were from the United States, including 122 Floridians, more than any other state.
The study found that Act 22 grantees had bought $1.3 billion worth of real estate and planned to make $679 million in capital investments. In addition, the grantees generated an additional $40 million in tax revenue during the life of the incentive.
But the lawmakers said the wealthy are receiving breaks not available to all Puerto Ricans and at a time when the island needs the tax revenue. And they questioned if some individuals and companies were gaming the system by lying about the time they spent on the island and creating pass through companies that did little real work in exchange for the hefty incentives.
“The evidence strongly suggests certain tax provisions are lining the pockets of wealthy individuals who partially reside in Puerto Rico, while doing nothing to benefit the people of Puerto Rico,” Rep. Nydia M. Velázquez (D-NY) said. “The Treasury Department needs to take a hard look at these provisions so we can determine whether they are functioning as intended or inadvertently allowing the wealthy to skirt tax obligations and depriving Puerto Rico and the federal government of needed revenue.”
