- The Washington Times - Thursday, October 10, 2002

There is little wonder why the "Economic Revitalization Act of 2001 for Puerto Rico" enjoys such wide bipartisan support. Some 50 members of Congress, ranging from Sens. John Breaux and Orrin Hatch to Reps. Phillip Crane and Charles Rangel, have joined me as cosponsors of the bill. Designed to replace tax incentives (in IRS Code Sections 936 and 30A) that will be phased out in 2006, the legislation would stimulate investment and employment in Puerto Rico. Given the fact that roughly 90 cents of every dollar that flows into Puerto Rico returns to the United States,either as purchases or tax contributions, the bill's supporters wisely recognize that tax policy that is good for Puerto Rico is good for America.
The legislation (which pertains to IRS Code Section 956) is an intelligent approach to economic development that eliminates loopholes that could be exploited by large corporations. If enacted, corporations will be compelled to use standard arm's-length pricing rules, which will prevent companies from shifting profits generated outside of Puerto Rico to Puerto Rican subsidiaries as a means of minimizing their tax burdens. This would ensure that any tax benefits are tied solely to a company's actual operations on the island, thereby maximizing the economic benefits of the legislation.
Absent the legislation, the income-tax incentives that Puerto Rico provides to U.S. manufacturing companies would be transferred to the IRS when these companies pay dividends back to their U.S. parents. This is because the United States taxes active foreign-source income earned by foreign subsidiaries when it is remitted to the U.S. corporate parent. Unlike the United States, half of the Organization for Economic Cooperation and Development countries have "territorial" tax systems that typically impose no such tax on active foreign source-income. Moreover, the legislation would enable the IRS to capture tax revenue that would otherwise be lost, as most companies would maintain these funds at offshore havens such as Bermuda.
Since 1948, Puerto Rico has pursued an economic-development strategy that provides tax and other economic incentives for employment-generating manufacturing operations. This approach has proved successful, as Puerto Rico's economy, which boasts an annual gross domestic product of $68 billion, has emerged as one of the strongest in the Caribbean. As a result of its economic growth, Puerto Rico is the leading per capita consumer of U.S. goods, purchasing more products than many larger countries such as China, Italy, Russia, Brazil and Australia. In 1999 alone, Puerto Rico purchased $16 billion worth of U.S. goods, which translates into 320,000 U.S. jobs.
Unfortunately, much of this progress is being undone by the flight of manufacturing jobs to countries without wage, workers' safety and environmental standards that therefore can provide manufacturers much lower operating costs. As a U.S. Commonwealth, Puerto Rico is bound by the same federal protocols as companies operating on the U.S. mainland. As a result of this competitive disadvantage, 27,000 manufacturing jobs in the last five years alone have been lost to China, Singapore, Malaysia and other foreign countries. That's 27,000 jobs lost by U.S. citizens living in Puerto Rico.
The Economic Revitalization Act is a win-win proposition: It would encourage significant investment in Puerto Rico, which would in turn stimulate the U.S. economy. The clear and generous returns of the legislation are difficult to overlook even to those who prefer to examine such matters from a hopelessly partisan viewpoint.

Anibal Acevedo-Vila is resident commissioner and a member of Congress from the Commonwealth of Puerto Rico.


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