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Tuesday, March 26, 2013

NY Times: Puerto Rico Creates Tax Shelters to Lure the Rich

NY Times DealBookNew York Times DealBook:  Puerto Rico Creates Tax Shelters in Appeal to the Rich, by Lynnley Browning:

Known for its white-sand beaches and killer rums, Puerto Rico hopes to stake a new claim: tax haven for the wealthy.

Since the beginning of the year, the island has gone on a campaign to promote tax incentives that took effect last year, marketing its beautiful beaches, private schools and bargain costs in an effort to lure well-heeled hedge fund managers and business executives to its shores.

So far, Puerto Rico’s pitch has attracted a handful of under-the-radar millionaires. Several American executives of mostly smaller financial firms say they have already relocated to the island, and Puerto Rican officials say another 40 persons, mostly from the United States, have applied. ...

Puerto Rico is a commonwealth of the United States, but for tax purposes, it is treated differently. Most residents of Puerto Rico, with the exception of federal employees, already pay no federal income tax. A person needs to live 183 days a year on the island to become a legal resident. ...

The new tax breaks are a twist on the island’s tradition of using tax perks to bolster the economy. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. In 2006, a previous incentive exempting United States companies from paying taxes on profits from Puerto Rican manufacturing ended after Congress said that the incentive had bilked taxpayers.

The new tax breaks are a radical shift in that they focus on financial, legal and other services, not manufacturing. Puerto Rico slashed taxes on interest and dividends to zero from 33 percent, and it lowered taxes on capital gains, a major source of income for hedge fund managers, to zero to 10 percent.

The incentives work with existing United States breaks. While residents still have to file a federal tax return, they do not have to pay capital gains taxes of 15 percent on assets held before moving and sold after 10 years of island residency.

The new tax incentives “likely will be considered more broadly by some taxpayers as a new opportunity for income shifting and tax deferral,” said Michael Pfeifer, an international tax lawyer at the law firm Caplin Drysdale in Washington.

(Hat Tip: Mike Talbert, Bill Turnier.)

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Comments

NYT got about half the facts right. The 1996 Committee report accompanying the act which repealed the section 936 credit says it was "not appropriate" not "bilked taxpayers." The article does not make it clear that the low tax rates are only for Puerto Rico source income. Journalists, even experienced ones like Browning, never seem to be able to tell a straight story when it comes to taxes and tax policy.

Posted by: TexEcon | Mar 27, 2013 11:03:11 AM