GOP Tax Plan Would Batter Puerto Rico’s Economic Backbone

Updated on
  • GOP measure threatens one of the industry’s favorite havens
  • Tax shift could add to island’s woes after storm, bankruptcy

After Puerto Rico’s ailing economy was crippled by Hurricane Maria, the island’s leaders fear that the Republican tax overhaul could deliver another devastating blow.

The legislation, passed by the House this month and under debate in the Senate this week, would end provisions that turned Puerto Rico into a medical manufacturing hub. Drug and device makers have poured billions into the U.S. territory, creating thousands of jobs and powering almost a third of its economic output.

Officials worry that the proposal will smother the island as it grapples with as much as $100 billion in storm damage, an exodus of workers and the largest municipal bankruptcy in U.S. history.

Destroyed homes from Hurricane Maria in San Juan on Sept. 25.

Photographer: Alex Wroblewski/Bloomberg

“You’re talking about an industry that is really the backbone of the economy,” said Manuel Laboy, Puerto Rico’s secretary of economic development and commerce. “Many of the Congress members on the Hill, they don’t understand how our economy works.”

Much is also at stake for drugmakers, which have spent millions lobbying to protect their tax advantages. Puerto Rico accounts for about 10 percent of U.S. drug manufacturing, including blockbusters like arthritis treatment Humira and cholesterol fighter Crestor.

“That House bill is bad news for the drug industry,” said Ira Loss, senior health-care analyst at research firm Washington Analysis LLC. “This is an island that was in trouble before the hurricane. It’s in really big trouble now.”

Tax Paradise

Congress wants to force multinationals to pay a one-time tax on their estimated $3.1 trillion in accumulated offshore earnings while cutting the corporate rate to 20 percent from 35 percent, the highest in the industrialized world. The Senate is expected to vote on a version of the legislation this week.

Puerto Rico’s ambiguous status has made it a tax paradise for drugmakers. Under U.S. law, the commonwealth is considered both a foreign and domestic entity, depending on the rule. Drugmakers can incorporate factories there as foreign subsidiaries, but the products can be labeled as U.S.-made.

A U.S. drug company can buy its own products from its Puerto Rico plant and attribute the proceeds to its island subsidiary, where U.S. income taxes don’t apply. As long as the cash is kept offshore, the company owes nothing to the Internal Revenue Service and pays the territory’s local 4 percent excise tax.

For drug giants, that arrangement has offered powerful rewards.

In 2003, the year after Amgen Inc. restructured its Puerto Rican unit as a foreign subsidiary, it paid a 28.8 percent tax rate and had $1.6 billion of cash offshore. By the end of last year, its effective tax rate fell to 15.7 percent and its offshore cash swelled to $35.9 billion.

Amgen said in its 2016 annual report that “substantially all” of its tax benefit from offshore operations “is attributable to our foreign income associated with our operations conducted in Puerto Rico.”

Jobs Drain

The bill the House passed in mid-November proposes a 20 percent excise tax on offshore transactions to protect American jobs. But Puerto Rico officials say the measure could have the opposite effect.

Drug-industry jobs won’t be moving “to Alabama or any other state. They are going to go to Ireland. They are going to go to Malaysia,” said Jenniffer Gonzalez-Colon, Puerto Rico’s nonvoting member of Congress and a Republican. “Congress and the administration ran on the platform of supporting American manufacturing. That’s exactly what the manufacturing sector in Puerto Rico is -- it’s American jobs.”

Amgen is Puerto Rico’s second-largest taxpayer, according to Laboy’s office, providing revenue to repay the $74 billion the territory owes. Up to a third of the money collected by Puerto Rico’s treasury comes from pharmaceutical-company coffers, though other multinationals also have manufacturing bases there.

While U.S. companies pay local excise taxes on the purchase of their own products made in Puerto Rican plants, the IRS reimburses them.

“It’s taxes that would have gone to the states but it stays in Puerto Rico because the tax is credited,” said Ramon Ponte, president of the territory’s society of certified public accountants.

In Amgen’s case, federal credits lowered the total rate about three percentage points, according to its filings. 

“We are encouraged to see tax reform that is focused on helping U.S. companies be more competitive in the global marketplace and promoting U.S. investment and job growth,” said Amgen spokeswoman Kelley Davenport. “We also hope Congress strengthens competitiveness for our fellow Americans in Puerto Rico.”

Amgen spent $8.6 million on lobbying this year, the most of any single drugmaker, according to the Center for Responsive Politics. At least five lobbying firms, including the company’s in-house team, were hired to raise issues related to Puerto Rican taxes, disclosure forms show. Davenport said that Amgen has lobbied on a range of issues.

“A number of organizations, including Amgen, have major investments in Puerto Rico that were made there to capitalize on the tax advantages created by U.S. laws,” Chief Executive Officer Robert Bradway said on a call with analysts in October. The bill should “maintain the incentive for us and others to invest on the island.”

Johnson & Johnson and AbbVie Inc. have also hired lobbyists on the issue. Spokeswomen for the companies declined to comment. 

The uncertainty couldn’t come at a worse time. Many residents are leaving Puerto Rico rather than wait for basic services to be restored. Puerto Rico’s payrolls declined by 3.6 percent in October, according to the Bureau of Labor Statistics, and 189,000 people have fled to Florida in the storm’s aftermath, according to that state’s Division of Emergency Management.

Drugmakers have resumed production, but many aren’t running at full capacity.

‘True Allies’

In a statement Monday, Governor Ricardo Rossello said he would travel to Washington with private-sector leaders to ensure Puerto Rico is treated as a domestic entity. He said the island should be excluded from the Senate-proposed 12.5 percent tax on income from intellectual property held in foreign jurisdictions.

Laboy, the economic development secretary, said he appreciated how companies have gone to bat for the commonwealth. 

“We have received a lot of support from the FDA and the leadership of these companies,” he said. “They are being true allies.”

Resident commissioner Gonzalez-Colon and House Speaker Paul Ryan issued a joint statement after the legislation passed, saying they were looking for more ways to help, without providing details. Gonzalez-Colon said she wasn’t seeking tax haven status; she just wants to be sure Puerto Rico is considered a part of the U.S.

Meanwhile, many Puerto Ricans will be watching to see whether they should brace for a second catastrophe -- this time one brewed in D.C.

“Maria was a Category 4, 5 hurricane -- if the tax reform passes through the way it is, it’s going to be a Category 7,” said Tom Vincent, vice president of Prime Air Corp., a logistics firm that serves the plants. “It would make anyone in Puerto Rico lose sleep.”

— With assistance by , and Lynnley Browning

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