Puerto Rico has used its limited tax autonomy to attract investment through tax incentives and tax decrees, as well as federal policies like the now-defunct Section 936.
By THE STAR STAFF
Some 100,000 jobs may be at risk unless the government passes legislation soon to mitigate the impact of the global minimum tax (GMT) by January, according to Espacios Abiertos, a non-profit group.
EA is slated to present on November 20 at the Faculty of General Studies in the UPR Rio Piedras on the local impact of the law. Governor Pedro Pierluisi has said he is interested in convening a special session to correct certain laws and to approve legislation related to the GMT, but the incoming government has objected to it.
The global minimum tax, which is based on the Global Anti-Base Erosion (GloBE) Model Rules, ensures that large multinational enterprises pay a minimum level of tax on their income in each jurisdiction where they operate, thereby reducing the incentive for profit shifting and placing a floor under tax competition, bringing an end to the race to the bottom on corporate tax rates. That tax is 15%.
EA earlier this year analyzed the effects of the 15% GMT in Puerto Rico, evaluating both the opportunities and risks it presents.
Historically, Puerto Rico has used its limited tax autonomy to attract investment through tax incentives and tax decrees, as well as federal policies like the now-defunct Section 936, which provided tax incentives to US multinationals doing business in the U.S. territory.
The elimination Section 936 led Puerto Rico to an economic crisis, decreasing investment and employment. In response, the government enacted laws such as Act 154 of 2010 and Act 52 of 2022 to stabilize local tax policy. “Implementing the GMT in Puerto Rico could significantly increase tax revenues in the short term but also pose long-term risks if the island does not adapt its economic model to mitigate these impacts,” the EA said in its report.
The digitization and globalization of the economy have allowed
multinationals to shift profits to low-tax jurisdictions, resulting in significant tax revenue losses globally. This situation has led over 140 economies to cooperate to implement a GMT to ensure more equitable taxation and sufficient funding for essential public services.
The OECD and the G-20 have developed the BEPS or Base Erosion and Profit Shifting, which is a tax planning strategy used by multinational corporations (MNEs) to avoid paying taxes.
Some estimated 147 jurisdictions have committed to reforming international taxation through two pillars. Pillar I seeks to reassign taxing rights over the profits of large multinationals to the markets where their sales occur. Pillar II, which includes the Global Minimum.
Tax (GMT) and the Subject to Tax Rule (STTR), establishes a minimum tax of 15% for multinationals with consolidated annual revenues exceeding 750 million euros.
The EA report projected potential tax revenues for 2024 and 2025 under different scenarios. If Puerto Rico implemented the QDMTT, it could collect up to $3.8 billion annually, primarily from U.S. foreign corporations. However, if the QDMTT is not implemented, other jurisdictions could claim part of these revenues.
According to the EA report, the island could collect $60.0 million from European corporations and $17.6 million from corporations in other countries.
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