Acts 20/22 here to stay, DDEC’s Bacó says

Acts 20/22 here to stay, DDEC’s Bacó says
Edition: February 12, 2015 | Volume: 43 | No: 5

While KPMG’s tax-reform report calls for changes to the Acts 20/22 program, these lures to attract capital investment are here to stay, said Alberto Bacó Bagué, secretary of the Economic Development & Commerce Department (DDEC by its Spanish acronym).

“Act 20 and the rest of the incentives laws should be subject to periodic evaluation to make sure they fulfill their objective of economic growth,” he conceded.

“Our public policy is clear: We are steadily converting Puerto Rico into an international services hub. The vibrant promotion of our six main incentives laws [Act 20, Act 22, Act 27, Act 84, Act 273 and Act 399] has made viable the second grand economic transformation of Puerto Rico,” Bacó said.

To date, more than 400 people have moved to the island under Acts 20/22, investing more than $6 billion in Puerto Rico and creating more than 1,000 jobs, according to government estimates. Former Gov. Luis Fortuño passed the incentives, established under former DDEC Secretary José Ramón Pérez-Riera, with little publicity in 2012. Since then, Gov. Alejandro García Padilla’s administration has been touting these tax breaks to promote investments and attract foreign businesses to the island.

KPMG’s report calls for the repeal of Act 22, which provides 0% tax on investment income for individual investors. The report classifies these benefits as tax expenditures and recommends Act 22’s repeal or modification to simplify tax reporting and increase compliance.

“This recommendation won’t be adopted,” Bacó said, who noted Acts 20/22 were expanded last year—to include people who have lived in the mainland U.S. for at least six years, instead of 15—after KPMG issued its report. “Individuals under Act 22 are subject to Puerto Rico taxes on all other streams of income not covered by Act 22, thus broadening the tax base,” he noted.

KPMG also calls for a revision of Act 20—which provides 4% tax on service income, such as a hedge fund’s management fees—”to condition the receipt of benefits under the law on a certain minimum threshold of activity in Puerto Rico, based either on number of employees, payroll expense or property owned in Puerto Rico.”

Since January 2013, DDEC has established a strict policy that requires a minimum of three employees for each Act 20 company, Bacó noted.

“Since enactment, these laws have allowed local, small, midsize and multinational companies to provide services in the global market from Puerto Rico,” Bacó said. “We reiterate our commitment to an already successful program and trust that we will continue seeing positive results for many years to come.”

“While it’s still too early to tell, all the available signals indicate this program has been super-successful,” said Miguel A. Ferrer, a veteran investment banker with more than 50 years’ experience in finance who served as president and then chairman of UBS-Puerto Rico from 1983 to July 2014. “These acts all by themselves have revived Puerto Rico’s luxury real-estate market, which now has much more demand than product.

“The Acts 20/22 program goes to the core of turning around our economy, which is economic development,” Ferrer said.

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