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Congress Asks GAO to Examine Tax Compliance in Puerto Rico

Following up on last week’s IRS announcement of a new campaign to identify illegal activity surrounding Act 60, a Puerto Rican law that provides tax breaks for people who move from a state to Puerto Rico, Congressional leaders have written to the U.S. Government Accountability Office (GAO) to request an examination of the law’s impact and possible fraud.

Act 60 is unpopular among many local residents of Puerto Rico who believe that it is creating problems of gentrification on the Island. Some of the territory’s lawmakers are trying to change the terms of the law.

Congressional letter

U.S. House Natural Resources Committee Ranking Member Raúl M. Grijalva (D-AZ), Rep. Nydia Velázquez (D-NY), Rep. Alexandra Ocasio-Cortez (D-NY) and Rep. Richie Torres (D-NY) wrote the letter to U.S. Comptroller General of the General Accountability Office, Gene Dodaro.

“We write to request that the Government Accountability Office (GAO) conduct an assessment of provisions relating to certain tax breaks provided to individuals and businesses in Puerto Rico under Puerto Rico’s Act 60 of 2019,” the letter began. “Specifically, those provisions that exempt individuals from almost all local taxation on Puerto Rico-sourced income if they ‘reside’ on the island for a majority of the year and make minimal economic contributions to the territory. We request that the GAO review these provisions because we are concerned that they have not benefited the people of Puerto Rico and may have led to significant tax avoidance by wealthy individuals ‘residing’ on the island.”

The use of “reside” squares with the concern of the IRS that some people taking advantage of Act 60 do not in fact live in Puerto Rico, as the law requires. They are required to live on the Island for at least half of the year. The IRS has identified about 100 individuals who do not actually live in Puerto Rico but who have still been classified as beneficiaries of Act 60.

“The territorial tax exemptions granted to those seeking to avoid Federal taxes stand in stark, unfavorable contrast with the treatment of long-time Puerto Ricans and most other individuals and corporate residents of the territory,” the letter continued. “For example, firms that provide minimum business investment and employment on the island pay a corporate tax of just four percent.”

The letter goes on to list some negative effects on Puerto Rico and its residents:

  • Puerto Rico has lost $2.22 billion in potential revenue between 2017 and 2023 and is expected to lose another projected $342 million this year because of the tax giveaways.
  • Since individuals are required to buy property on the Island to qualify for the tax breaks, a large number of wealthy people from outside of Puerto Rico have entered the housing market, skewing housing costs and pricing homes out of the reach of local residents.
  • The law supports existing businesses from off the Island, which compete with local businesses that do not receive the same breaks.

Questions of fraud

Websites operated by lawyers, financial advisers, and promoters of Act 60 relocation often describe the law as “tempting” people to misrepresent themselves in order to benefit from the tax breaks. The IRS is examining this group of people with an eye toward wire fraud in particular.

However, it is unclear just how much money Act 60 and its predecessors, Acts 20 and 22, have either cost or netted Puerto Rico. A study commissioned by the Puerto Rico Economic Development and Commerce Department and conducted by Estudios Técnicos claims that “Act 20 grantees added fiscal revenues which totaled $210 mm” between 2015 and 2019. “Per the recently published Tax Expenditures Report- the fiscal ‘cost’ of Act 20 is estimated at $111.3 mm for a single year… It is important to consider that the economic activity associated with Act 20 is in the form of new “monies” to the economy –from external markets. Therefore, the ‘costs’ of the program are most probably overstated, since the estimate assumes that the activity would be carried out in the absence of incentives.”

The Members of Congress are considering the costs to the United States Treasury as well as to the territory of Puerto Rico. An IRS report in 2020 gave the prior tax payments of individuals taking advantage of Act 22 at $558 million. This was the amount they paid in taxes before moving to Puerto Rico. If they did not in fact move to Puerto Rico or their income was not sourced there, they would still owe similar amounts.

The requests

In their letter, the Members of Congress asked the GAO to provide some specific information, including answers to the follow questions:

  1. To what extent are U.S. persons and businesses changing their residency status or relocating to Puerto Rico to claim tax benefits under Act 60 and previous Acts, and what benefits have they received? In addition, where were these persons and businesses residing prior to relocating to Puerto Rico? What was the federal taxable income of these persons and businesses during the 5 years preceding their relocation to Puerto Rico? How much did these persons and businesses contribute to their state of residence prior to relocating to Puerto Rico?
  2. What quantifiable and other effects have the tax benefits had on Puerto Rico’s economy, including effects on energy and housing markets?
  3. To what extent are the Internal Review Service (IRS) and the Puerto Rico Department of Treasury monitoring U.S. persons and businesses claiming tax benefits under Act 60 to ensure compliance and minimize fraud, and to what extent are they collaborating on any oversight?

Read the letter.

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