December will be the beginning of the end of the statutory gaps or “loopholes” that make possible corporate tax evasion, which has characterized the Federal Internal Revenue Code.
Initially, I was opposed to the just passed tax reform of President Donald Trump. These are empty statutes that Republicans and Democrats have proposed to eliminate to comply with the U.S. commitment to end the tax evasion of corporate income, hidden in low tax rate jurisdictions.
The reform aims to “bring home” three trillion dollars that U.S. companies have generated by creating foreign corporations that they control, known as “controlled foreign corporations” and put to pay what they generate in the future. The contributory reform proposes to reduce from 32 percent to only 20 percent the federal contributions on the profits generated in the United States, including the domestic companies that operate in its territory of Puerto Rico.
It also proposes that the three trillion dollars in foreign earnings that have evaded federal taxes pay between 5 and 14 percent, and that future profits from the sale of products developed in the states, completed abroad only to evade contributions and sold to the states, pay between 10 and 20 percent to the federal government, instead of paying nothing.
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The reform, as approved by the House of Representatives and the Senate Finance Committee, does not modify the treatment of Puerto Rico. With these new changes, U.S. companies that choose to continue operating as domestic companies in Puerto Rico would see their tax rate drop dramatically, from between 35 percent and 32 percent to only 20 percent. Companies that have channeled their income through their controlled foreign corporations, incorporated only to evade contributions, will pay between 5 percent and 20 percent. In the case of Puerto Rico, they will not pay a customs or border tax or tariff, as some of them mistakenly warn, since there is no border to cross between Puerto Rico and a state, because we are one country!
These new rates would apply globally, so that controlled foreign corporations would no longer find any country or U.S. territory where they could find refuge against federal contributions.
There are several ideas that can bring competitive justice to Puerto Rico.
Some, like the proposal of a handful of members of the Industrial Association, allegedly led by Amgen, and endorsed by some lobbyists representing government agencies and private interests simultaneously, would exempt CFCs from paying 20 percent, making our territory the only contributory paradise in the world. That idea was already rejected by the Federal Chamber in full and by the Senate Finance Committee, as it was previously rejected when it was proposed by Governor Alejandro García Padilla.
There are other ideas that have a greater chance of prevailing, such as that of our congresswoman Jenniffer González and speaker Paul Ryan, which was endorsed and proposed in the past by Governor Pedro Rosselló González and Resident Commissioner Luis G. Fortuño. The proposal would make Puerto Rico a Business Investment Zone, a mechanism that could occur both in a territory and in a State. That idea would generate billions of dollars in additional economic activity, as well as thousands of jobs.
Incentives like Section 936, which give benefits to companies that far exceed the value of the benefits the worker receives, no longer have a place in today's world. There is no longer room for tricks that resulted in attributing to Puerto Rico gains for products actually developed in the states that far exceed the benefits for our people.
What we should not do in this final stretch is to ask our lobbyists to dedicate themselves to push harder and not get anywhere with unreal proposals that cost much more than what helps Puerto Rico, and distort the federal funds we need to other more efficient and beneficial incentives for people.
Neither should changes be proposed that move our territory away from the rest of the country and that can only exist under a second class territorial status and not under the statehood that Puerto Rico wants or even under independence. These proposals interfere with the exercise of international natural law and the American constitutional right of self-determination and politicize a discussion that must be economic and not political.
If almost all states successfully operate an IVU and no state impose a general discretion, it is inconceivable that we consider imposing a collection system that makes us look like a republic and not a state.
If the people suffer, the government should not use its own suffering to impose anti-American tax changes that violate the mandate issued less than six months ago for these same suffering people. The federal government has provided the territorial government with $ 4.9 billion to replace what it has not collected in IVU and other taxes during our long recovery.
The excessive and ineffective incentives that corporate evaders have received have cost billions of dollars annually and are the same ones that presidents, senators and congressmen have used as an excuse to refuse to extend equality in federal programs to Puerto Rico and some of the other territories.
The final solution? Move away from costly and ineffective incentives, propose effective and less costly ideas that benefit more individuals, and propose that the savings generated will be used to promote, among other things: equity in infrastructure construction; equality in Medicare, Medicaid and Children’s Health Insurance Plans (CHIP); equality in nutritional assistance; equal expansion in the Child Tax Credits; and the extension of Earned Income Tax Credits.
That should be our agenda, to move away from separation and to move towards economic integration.
Kenneth McClintock is the former Senate President and Secretary of State of Puerto Rico.