Isla Verde Beach, Puerto Rico (Source: Wikipedia)
Puerto Rico has become a tax haven. But the tax haven is bankrupt.
On the one hand, the central government and several of its public corporations are bankrupt. For three years, Puerto Rico has suffered the imposition of an oversight board that implements severe austerity measures that impoverished people every day. Massive cuts in public spending are intended to save money to pay bondholders, primarily so that Wall Street vulture funds can rake in millions in profits.
On the other hand, the government grants tax exemptions to large corporations and multi-millionaire investors who take advantage of the precarious situation in the country. In 2017 alone, the fiscal cost of all tax exemptions was estimated at over $20 billion.
There is hardly any public discussion about the magnitude of these exemptions. The country has long remained in the dark about who the beneficiaries of these exemptions are. However, the government is taking affirmative steps towards greater transparency.
The Puerto Rico Department of Economic Development and Commerce (DDEC) published the list of individuals and companies benefiting from several of the tax exemptions that currently exist. Each record in the data set includes the law that authorizes the exemption, the name of the beneficiary, and the date the incentive was approved.
This article highlights some of the beneficiaries included in the list.
Among the most notorious of these laws are Acts 20 and 22. Act 20 imposes an income tax of only 4% on companies that export their goods or services outside of Puerto Rico. Act 22 frees individuals that move to Puerto Rico, particularly investors, from paying taxes in dividends and capital gains. The list also includes one of the most important tax exemption laws, Act 73 of 2008, known as the Economic Incentives for the Development of Puerto Rico Act.
The list published by the DDEC records 1,924 Act 20 designations from 2012 to 2019. In the case of Act 22, it has helped generate a kind of gentrification on a larger scale, where millionaires move to Puerto Rico to pay almost no taxes while thousands of families emigrate from the country due to poor living conditions. According to a study published by the DDEC, from 2012 to 2019, 2,612 designations were approved under Act 22. Meanwhile, the census numbers show that in those same 8 years Puerto Rico lost around 440,000 inhabitants.
However, the tax cost of Acts 20 and 22 is negligible if we compare them with those provided by the Economic Incentives for the Development of Puerto Rico Act.
The tax haven cost: $20 billion
In 2017, while Ricardo Rosselló’s administration closed 183 public schools and, under the auspices of the oversight board, approved a cut of more than $500 million to the budget of the University of Puerto Rico, the government granted $20 billion in tax concessions.
This number emerges from a report published by the Puerto Rico Department of Treasury in September 2019, when it first disclosed the expenses incurred by the government in granting each of the existing tax concessions (reductions in taxes payable) in the country. The “Tax Expenditure Report for the 2017 Tax Year” details all tax concessions (exemptions, credits, etc.) granted by the government in 2017 and its fiscal cost. In other words, the report identifies each tax concession and the amount of money that the Treasury stopped entering for them.
The cost of all tax concessions for 2017 was over $20 billion. To get an idea of the magnitude of this loss, it is more than double the operational budget allocated to the government for the 2017-2018 fiscal year. This in a country with a bankrupt government and with 43% of the population living below the federal poverty level.
It must be mentioned that some of these companies do business in Puerto Rico just because they enjoy these tax exemptions. With the publication of this report the debate on the effectiveness of the exemptions becomes more important.
The largest slice was to pay for Act 73 of 2008, known as the Economic Incentives for the Development of Puerto Rico Act. According to the report, Act 73 had a cost of over $15.6 billion, that is, about 75% of the total cost of all tax concessions. The report also states that 98% of the income subject to tax under this act, as well as under the Tax Incentives Act of 1998, comes from foreign corporations.
It is important to highlight that this report does not include information on Act 154 of 2010 that imposes a 4% excise tax on foreign corporations, mainly multinational companies that manufacture in Puerto Rico. Revenues from this tax for 2019 were $2 billion, which represented 18% of all revenues of the Puerto Rico Department of Treasury. These companies pay the 4% in Puerto Rico but deduct it in their federal payroll as a tax credit. The tax was supposed to be a temporary one, so the US Department of the Treasury is pressuring the local government to get a substitute and eliminate the credit.
Negotiations between the government and the multinational companies to evaluate alternatives to the 4% excise tax are taking place with little to no public disclosure and transparency.
Every penny that does not enter the public treasury as a result of these tax exemptions is money that cannot be invested in improving schools, hospitals and roads, or for the payment of pensions and salary improvements to teachers, among others.
The report on the cost of tax concessions for 2018 is stated to be published in March 2020.
Some names in sight
At the time of publishing this article, the DDEC list contains ten laws and about 10,800 names of individuals and companies. From the exam we did of the list we highlight the following names:
- Pietrantoni Méndez & Álvarez (PMA): PMA is one of the largest law firms in Puerto Rico and in September 2014 they received an Act 20 decree. They are most known for their corporate practice. Several multinational corporations stand out on their website as clients, as do the three local banks, Popular, FirstBank and Oriental Bank. Furthermore, PMA is one of the law firms that has benefited most from the creation of Puerto Rico’s debt. Documents of the offering statements of bond issuances of the government and its public corporations show that, between 1997 and 2014, PMA participated as legal advisor in at least 56 bond issuances. Together, these issuances totaled over $40 billion. It is not possible to know how much PMA profited for its services in these transactions from the current publicly available documents.
- Rushmore Loan Management Services LLC: Rushmore is a firm that invests in the real estate market, particularly in the administration of mortgage loans. The firm announced the start of its Puerto Rico business in August 2014. By November 2015, Rushmore already enjoyed the benefits of Act 20.
Meanwhile, according to the Puerto Rico Office of the Commissioner of Financial Institutions, between 2014 and 2019 Rushmore executed 2,369 mortgages. A report by Hedge Clippers showed that Rushmore is a subsidiary of Roosevelt Management Company LLC, which in turn is affiliated with TPG Capital, one of the largest private equity funds in the United States. TPG manages a total of $119 billion in assets.
- The Ferré Rangel Family: The Ferré Rangel family stands out as one of the richest families in Puerto Rico. In addition to owning multiple companies, they also belong to several boards of directors of nonprofit organizations, such as the Ponce Museum of Art, the Sor Isolina Ferré Center, and the Center for a New Economy, among others. They also have interests in Banco Popular since María Luisa Ferré Rangel is a director and shareholder of Popular Inc., the bank’s parent company.
The Ferré Rangel family has at least three corporations that benefit from Act 20. They are GFR Media LLC, the company that owns El Nuevo Día and Primera Hora newspapers; GFR Services Inc., a company that, according to its 2018 financial statement, offers administrative services to the other companies of the Ferré Rangel; and Linkactiv Automotive LLC (now Linkactiv North America LLC), a call center and marketing company.
- Microsoft Operations Puerto Rico LLC: Microsoft is one of the largest companies in the world. The technology giant is mainly dedicated to the development of programs and operating systems for computers, such as Windows and Office. According to Forbes magazine, the founder of Microsoft, Bill Gates, is the second richest person in the world, with a net worth of over $100 billion. Last year, Microsoft reached a market value of $1 trillion (a 1 followed by twelve zeros). However, one of its subsidiaries in Puerto Rico, Microsoft Operations Puerto Rico LLC, has enjoyed the benefits of Act 20 since December 2018 and of Act 73 since May 2019.
Microsoft Operations Puerto Rico LLC is key to Microsoft’s strategy to pay less taxes through transfer pricing, which is when two affiliated companies make transactions with each other. According to a report by ProPublica, Microsoft has transferred at least $39 billion in profits from the United States to Puerto Rico since 2005. To achieve this, Microsoft sold the exclusive rights of its technology for the production of CDs with its programs for the North and South American markets to Microsoft Operations Puerto Rico LLC. The earnings were then reported in Puerto Rico, where they pay almost a 0% tax rate, instead of reporting them in the United States, where they would have paid a 35% tax rate.
- Nicholas Prouty: Prouty, an Act 22 beneficiary since October 2013, is a businessman known for being the owner of Ciudadela in Santurce. Ciudadela is a housing project for wealthy people and its construction was made possible by the forced expropriation of the San Mateo community. Prouty was not part of that expropriation process, as they were before his purchase of Ciudadela in 2012 through Putnam Bridge Funding. Recently, Ciudadela was mentioned in former Secretary of Education Julia Keleher’s second arrest by the FBI. Keleher is accused of assigning land from a public school to Ciudadela in exchange for benefits in terms of rent and purchase of an apartment in the project.
- Brian Tenenbaum : Tenenbaum, an Act 22 beneficiary since December 2014, is the chief operating officer of The Morgan Reed Group in Puerto Rico. Tenenbaum’s name appears in a contract with the Puerto Rico Department of Transportation and Public Works (DTOP) for the purchase of what was a public school by Mr Blue Ocean LLC. The name of the administrator and the emails that appear on the certificate of incorporation of this company are related to The Morgan Reed Group, a real estate firm with properties in several states of the United States and Puerto Rico. An examination of several contracts registered by the DTOP at the Comptroller’s Office shows that corporations related to The Morgan Reed Group bought at least four public schools in 2019. Here are the contracts: Mr Blue Ocean LLC, Shinrai Holdings LLC, and this one and this one from Mr Bull LLC.