The tax exemptions that the Puerto Rican government intends to offer investors through the Opportunity Zones law “may not comply” with the Fiscal Plan. Tax credits of up to 25 percent and exemptions in the payment of municipal patents were indicated by the Fiscal Control Board as a “cause for concern”.
“There are provisions of the law that apparently make it inconsistent with the Fiscal Plan of the Government of Puerto Rico … The municipal exemption provision could be burdensome to the municipalities,” Edward Zayas, spokesman for the Board told the Investigative Journalism Center (CPI) of Fiscal Control (JCF).
The Law of Opportunity Law was signed by former Governor Ricardo Rosselló on May 14 but has not been enforced because it still lacks a regulation for its implementation. Although so far this law is practically null, in August the Government approved a list of commercial activities that could be recognized as “Priority Projects in Opportunity Zones”.
The designation of priority projects in Zones of Opportunity was also questioned by the JCF, because they could conflict with the list of “priority projects” for critical infrastructure established in Title V of the PROMESA law.
“The procedures for the designation of priority projects could include projects already contemplated in the Fiscal Plan instead of limiting the benefits to new or incremental investment,” said the JCF.
Manuel Laboy, secretary of the Department of Economic Development was not available for two days to answer the CPI’s questions about the Zones of Opportunity. When the CPI insisted on the request for information, the agency indicated that “at the end of this week” it would send a statement “with information” related to the subject. In October, Laboy had said that between five and ten projects had presented interest in the incentives of the Zones of Opportunity, that one had made the formal request and that the regulation would be ready “in the coming weeks”.
The Opportunity Zones were designated as part of President Donald Trump's tax reform and offer a 37.5 percent to 20 percent reduction in the federal tax rate to funds that invest in "low-income communities." Since that legislation was created in 2018, the governments of the states and territories entered into competition to attract investors who seek the benefits of the Opportunity Zones by creating legislation that adds exemptions to those already granted by federal law. Some states include additional exemptions to be more competitive. In the case of Puerto Rico, the JCF stressed that the local law of the Zones of Opportunity is broader than other state laws of the United States. State governors can designate as an Opportunity Zone only 25 percent of the territories that qualify as low-income areas. In contrast, an exception from Congress allowed almost 98 percent of Puerto Rico to be declared an Opportunity Zone. The Federal Treasury Department estimates that the exemptions from the Opportunity Zones will cost $ 1.6 billion between 2018 and 2027. The nonprofit organization Good Jobs First notes that this law will have a direct negative impact on the collection of taxes to Statewide. So far only four states have estimated the cost that the Opportunity Zones will have for their collections. The Georgian government estimated the fiscal cost at $ 10 million for 2019. Maine between $ 1.5 million and $ 2.5 million for fiscal year 2020, Oregon at $ 10.5 million and up to $ 15.9 million for fiscal years 2017 to 2021 and Wisconsin at $ 10 million for fiscal year 2019, according to Good Jobs First.
The government of Puerto Rico has not estimated the cost of the exemptions it would offer through the Opportunity Zones law. The approved legislation indicates that the director of the Industrial Tax Exemption Office, Javier Bayón Torres, will report to the Committee of Priority Projects in Opportunity Zones “on the economic and fiscal impact of this law” after the close of each fiscal year.
The Committee, attached to the Office of the Governor, is composed of the Chief Financial Officer, Omar Marrero, who chairs it, as well as the Chief Investment Officer, the Executive Director of the Financial Advisory Authority and Fiscal Agency, the Executive Director of the Authority for Public-Private Partnerships, the Secretary of the Department of Economic Development and Commerce, a member appointed by the Senate and a member appointed by the House of Representatives.
“The fiscal impact of the Law depends on regulations that have not yet been issued. The Board understands that the incentive should focus on new and incremental investment … Those responsible for issuing regulations to enforce the provisions of the law are the Secretary of Economic Development and the Secretary of the Treasury (Francisco Parés); It is with them that we have been in communication since the corresponding bill was submitted, ”said the JCF spokesman.
“What the local law seeks is to provide additional incentives for what is given at the federal level. If the compliance of the local Law is maintained to federal law, it would keep Puerto Rico still in some more competitive state versus other states … If everything is eliminated, we definitely fall into a situation where it is not going to be so attractive to invest here, ”he said. Giovanni Méndez, tax lawyer of the Baltic Avenue Investment firm.