Puerto Rico has leveraged its constrained tax autonomy to draw investment through tax incentives and decrees, alongside federal strategies such as the now-obsolete Section 936.
By THE STAR STAFF
Approximately 100,000 jobs could be endangered unless the government enacts legislation promptly to alleviate the effects of the global minimum tax (GMT) by January, based on insights from Espacios Abiertos, a non-profit organization.
EA is scheduled to present on November 20 at the Faculty of General Studies at UPR Rio Piedras regarding the local implications of the law. Governor Pedro Pierluisi has expressed interest in convening a special session to amend certain laws and approve legislation pertaining to the GMT; however, the incoming administration has raised objections.
The global minimum tax, grounded in the Global Anti-Base Erosion (GloBE) Model Rules, aims to ensure that large multinational corporations pay a basic level of tax on their earnings in each jurisdiction they operate within, thereby diminishing the temptation for profit shifting and establishing a baseline for tax competition, effectively concluding the downward spiral of corporate tax rates. This tax is set at 15%.
Earlier this year, EA assessed the ramifications of the 15% GMT in Puerto Rico, analyzing both the prospects and dangers it entails.
Traditionally, Puerto Rico has capitalized on its restricted tax autonomy to lure investment through tax incentives and decrees, along with federal measures like the now-defunct Section 936, which granted tax incentives to U.S. multinationals operating in the U.S. territory.
The discontinuation of Section 936 resulted in an economic downturn for Puerto Rico, leading to a reduction in investment and jobs. As a response, the government passed laws such as Act 154 of 2010 and Act 52 of 2022 aimed at stabilizing the local tax landscape. “Introducing the GMT in Puerto Rico could considerably boost tax revenues in the short term while also presenting long-term challenges unless the island adapts its economic framework to alleviate these affects,” noted the EA in its findings.
The digitalization and globalization of the economy have permitted
multinationals to transfer profits to jurisdictions with lower taxes, leading to substantial global losses in tax revenue. This has prompted more than 140 economies to collaborate on implementing a GMT to ensure fairer taxation and adequate funding for vital public services.
The OECD and the G-20 have formulated the BEPS (Base Erosion and Profit Shifting) initiative, which is a tax planning approach utilized by multinational corporations (MNEs) to minimize their tax liabilities.
Approximately 147 jurisdictions have pledged to reform international taxation through two pillars. Pillar I aims to reallocate taxing rights over the profits of significant multinationals to the markets where their sales transpire. Pillar II, which encompasses the Global Minimum Tax (GMT) and the Subject to Tax Rule (STTR), sets a minimum tax rate of 15% for multinationals with total annual revenues exceeding 750 million euros.
The EA report anticipated potential tax revenues for 2024 and 2025 across various scenarios. Should Puerto Rico activate the QDMTT, it stands to generate as much as $3.8 billion annually, mainly from U.S. foreign companies. Conversely, if the QDMTT is not enacted, other jurisdictions could capture a portion of these revenues.
According to the EA report, the island could potentially secure $60.0 million from European corporations and $17.6 million from companies in other nations.
