Last June, I asked if the U.S. Treasury was bailing out Puerto Rico with an unusual interpretation of the federal tax code. This waiver or exemption allowed U.S. multinationals operating in Puerto Rico to credit taxes that were paid to Puerto Rico on their federal tax bill. The tax, referred to as Act 154, was passed by the Puerto Rico legislature in 2011. It brought in approximately $1.6 billion in 2011.
When preparing its 2014 budget, Puerto Rico had a massive $1.5 billion deficit to fill. The governor had proposed expanding the “sales and use tax” (SUT or Cofina) by 73 percent, but this was met with strong resistance from the business community. The corporate excise tax (Act 154) was raised and part of the budget deficit was filled (an $800 million deficit is still projected for the current fiscal year).
Last week an excellent explanation of the corporate excise tax was published by Martin Sullivan on The Tax Analysts Blog. Sullivan highlighted the tax’s importance at 20 percent of general fund revenues:
On February 28, 2013, the government of Puerto Rico, citing the need for additional tax revenue because of continued poor economic conditions, expanded and extended the life of the excise tax to 2017 (Act 2-2013). Under the revised law, the tax rate will be 4 percent beginning on July 1, 2013, and through its new expiration date of December 31, 2017. The tax is now expected to raise $1.96 billion in fiscal 2014 (which began in July 2013). As shown in Figure 1, that is more than 20 percent of expected general fund revenue.
Sullivan questioned the validity of the tax and noted that the IRS had not ruled on whether it conformed to the U.S. tax code. Sullivan surveyed five tax attorneys who all had serious doubts about its constitutionality: