Puerto Rico Tax Changes to Net $500 Million in Revenue

Puerto Rico’s tax overhaul will add more than $500 million of revenue in fiscal 2012, said Juan Carlos Pavia, director of the commonwealth’s budget office.

The increase is “mainly a result of tax-compliance measures and the special tax to foreign companies,” Pavia said today in a telephone interview from San Juan.

Changes passed by the Legislature added a temporary 4 percent excise tax on foreign manufacturers. Lawmakers also instituted measures to discourage evasion in a U.S. territory where, according to the Treasury, 48 percent of sales levies go uncollected. Sales-tax revenue rose 3 percent in April from the year before, according to documents from the 2012 budget proposed by Governor Luis Fortuno in April.

The tax changes will more-than-cover reductions in corporate and individual income levies passed by the Legislature in January, Pavia said.

“We approved a tax reform which changed the structure of the revenues,” said Pavia. “How the revenues come in and from where they’re coming in.”

The Legislature is likely to pass Fortuno’s $9.26 billion general-fund budget with only minor changes by June 25, the last day of its session, he said.

Tax collections are projected to rise 6.4 percent to $8.65 billion next year from $8.13 billion this year, the governor’s budget says. Proposed spending will be 1.2 percent more than the current year, as payroll costs rise 2 percent, according to the budget.

Borrowing Plans

Pavia said the governor proposed a sale of bonds backed by sales taxes to make up the $610 million difference between revenue and spending, 40 percent less than this year.

Sales-tax-backed revenue bonds are sold through the Government Development Bank. The territory’s general-obligation credit rating is lower than that of any state. Moody’s Investors Service on May 3 put $28 billion of debt rated A3, its fourth-lowest investment grade, on watch for a possible downgrade.

Puerto Rico’s economy, which has contracted for five years, is forecast by the government to expand 0.7 percent in fiscal 2012, which begins July 1. An index of economic activity rose 0.3 percent in March from February, the development bank said May 11. The 1.8 percent annual decline was the smallest since August 2007, it said.

(Budget office corrects reference to legislative approval of bond sale in eighth paragraph.)
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