Puerto Rico and the Tax Cuts and Jobs Act

The tax bill passed by the House of Representatives mentions Puerto Rico specifically in a section called “Provisions Related to Possessions of the United States.” Puerto Rico, in common with other territories of the U.S., is a possession of the United States.

Rules for possessions of the United States

The first point in this section is the “extension of deductions for income attributable to domestic production activities in Puerto Rico.” This provision keeps the law on “domestic production activities” the same in 2018 as it has been in 2017. Domestic production activities are business activities. Some industries are not eligible for this deduction. For example, construction companies and restaurants are excluded. For many businesses that pay wages, though, this can be an important deduction.

The second mention of Puerto Rico is in the “extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.” The cover over is specific to rum distilleries. The new tax bill extends the current rules to 2023.

These two elements of the bill keep things as they are in Puerto Rico.

Change affecting Puerto Rico

The change affecting Puerto Rico doesn’t mention Puerto Rico specifically. Instead, it says that U.S. corporations have to pay a 20% excise tax on goods they produce in foreign countries and bring into the United States.

The object is to encourage U.S. companies to make their goods in the United States, with the idea of creating additional manufacturing jobs in the States. It’s also intended to discourage corporations from using foreign subsidiaries to reduce their tax burden.

It affects Puerto Rico because the U.S. territory is a foreign jurisdiction, when it comes to taxes and tariffs.Puerto Rico will be treated just like Ireland and Singapore under the new tax bill, even though it is a territory of the U.S. and residents are U.S. citizens.

Possible solutions

The Resident Commissioner of Puerto Rico, Congresswoman Jenniffer Gonzalez-Colon, told El Nuevo Dia that she is working with committee members to fix the problem.

Governor Ricardo Rossello said in a statement, “If the purpose of this tax reform is to bring back jobs to the United States, one must emphasize that Puerto Rico is part of the United States and because of that the island can’t be considered as a foreign jurisdiction.”

There are a number of possibilities. Puerto Rico has been a foreign jurisdiction for tax purposes for more than a century, but that could be changed. The territory could simply be designated a domestic jurisdiction.

Puerto Rico could also be specifically excluded from the tariff in question in this particular tax bill.

José Aponte Hernández, chairman of the Puerto Rico House of Representatives’ Federal, International and Status Affairs Committee, proposed that statehood for Puerto Rico be connected with the tax bill. As a state, Puerto Rico would not be affected by the new excise tax.

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