The Uncertain Future of Puerto Rico’s Tax Advantages

Unlike many other advisory services, we take a historical perspective when it comes to supposedly fresh and new ideas. And that’s why we’ve been skeptical of the tax incentives that Puerto Rico enacted in 2012 to attract wealthy individuals from the mainland US. These incentives, known as Act 22, are just the latest in a long series of tax breaks that Puerto Rico has offered since becoming a US territory in 1898. And based on the territory’s history, we believe there’s a high likelihood these incentives will be short-lived. Here’s why:

• Congress Can Easily Eliminate the Federal Tax Exemptions: As a US territory, Puerto Rico’s tax policies are ultimately subject to the whims of Congress. Lawmakers could amend the federal tax code at any time to remove the exemptions that make Act 22 so attractive.
• Criticism from Both Parties: Senators from both the Democratic and Republican parties have expressed concerns about Act 22, viewing it as an unfair “tax war” between Puerto Rico and the US mainland.
• Puerto Rico’s Lack of Credibility: The Puerto Rican government has a history of breaking its financial promises, recently forcing investors to take haircuts on government bonds. This undermines its ability to guarantee Act 22 will last until 2035 as promised.
• A History of Boom and Bust: Similar tax incentives in the past, like those for pharmaceutical companies in the 1970s, have come and gone as Congress has responded to their revenue impact.

Even if Congress doesn’t act, we believe Puerto Rico itself may eventually rescind Act 22. Many local residents are upset that new arrivals are receiving far more favorable tax treatment than they do. This could lead the opposition party, which favors statehood, to target the incentives if they take power. Ultimately, the Act 22 incentives seem too good to be true. While they may have initially attracted some wealthy individuals, the long-term viability of these tax breaks is highly questionable. History suggests they are likely to be short-lived.

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