The current application of Federal tax laws to Puerto Rico enables corporations and individuals from the States to use the territory to avoid Federal income taxes. Wealthy individuals in Puerto Rico also enjoy Federal tax advantages — but nearly three-quarters of Puerto Ricans do not.
Microsoft is an example of a company that famously shelters its earnings through Puerto Rico. From 2009 through 2011, it saved $4.5 billion by attributing 47% of its American sales to its operation in the territory. But it did not do much work there: It employs fewer than 200 people in its manufacturing plant in Puerto Rico. The territory gained very little from the computer software giant’s Puerto Rico Federal tax avoidance.
By contrast, Microsoft employs more than 40,000 people in the State of Washington — where it pays Federal income tax. Meanwhile, Puerto Rico’s unemployment rate stands at 15%, with three-fifths of the working-age population not in the workforce. This is a much higher level of unemployment than any U.S. State — Washington State has a jobless rate of 6.4%.
Microsoft is one example of three dozen companies in the States that manufacture in Puerto Rico. Avoiding Federal taxes is, obviously, its big incentive to funnel its earnings through Puerto Rico.
But avoiding Federal taxes is only one of the reasons that most of the multinational corporations that have established subsidiaries in Puerto Rico make location decisions. Low tax rates do not represent the entirety of criteria considered by businesses looking to expand into new areas or grow in current locations. Business leaders, instead, tend to explore a more comprehensive list of factors before making investments:
- a favorable business climate
- a favorable legal system, including labor laws
- a low level of government corruption
- strong infrastructure, including seaports, airports, roads, water, energy, etc.
- economic development and economic growth
- available financing
- a skilled and educated labor force
- ease in obtaining permits
When these factors are in place, companies can make money. Paying taxes on that money is a normal cost of doing business. In fact, many States and municipalities on the mainland offer significant tax incentives to individual companies — though these tax incentives pale beside Puerto Rico’s. If crime, supply chain problems, or high energy costs make it less profitable, convenient, or comfortable for a company to locate in Puerto Rico, the possibility of avoiding paying taxes will not make the location more palatable.
In fact, Puerto Rico has advantages that could make it highly competitive apart from any tax advantages:
- an educated workforce, including more than 10,000 STEM (science, technology, engineering, and math) graduates each year
- skilled labor at rates 20 % cheaper than the mainland U.S.
- bilingual workforce
- U.S. legal system and U.S. dollar simplify offshoring
- low inflation
- favorable geographic location with highly stable climate
Should Puerto Rico become a State, some $10 billion in additional Federal funds can be expected to follow and stimulate local economic activity. Puerto Rico can be counted on to follow the pattern established by all other territories that became States and became more prosperous with statehood.
In a way, the suggestion that Puerto Rico has nothing to offer corporations except avoiding Federal taxes reflects a bargain basement mentality. That attitude could prevent Puerto Rico from working toward more lasting improvements that would make the it attractive to investors over the long run.