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Puerto Rico Beyond IRS Reach Woos Paulson-Sized Fortunes

*from www.bloomberg.com, Mar. 14, 2013 (To view original article click here.)

Take Away #1: Puerto Rico allows individuals and companies the chance to elude the IRS.

Key Facts and Figures:

  • Puerto Rico is a U.S. Territory but occupies a space between foreign and domestic status.
  • The territory while having U.S. citizenship for its residents, has its own Olympic team and a tax system that allows for the chance to elude the IRS.

Take Away #2: Puerto Rico, eager for economic growth, is making an unusually direct pitch to wealthy Americans, risking a political backlash from Congress.

Key Facts and Figures:

  • The U.S. territory’s leaders are seeking to lure mainland residents such as hedge-fund billionaire John Paulson.
  • Moving to Puerto Rico could allow top-earning taxpayers to shield future income from the IRS without giving up their passports.
  • John Buckley, former tax counsel for Democrats on the House Way and Means Committee says, “This would be the first time that Puerto Rico would kind of deliberately erode the U.S. tax base for individuals.
  • 10 Americans have already taken advantage of a year-old Puerto Rico law that lets them avoid local ad U.S. capital gains taxes by signing agreements with the territory’s government.
  • Paulson is said to be considering such a move.

Take Away #3: The law was designed to promote investment in the territory, which wants to diversify its struggling economy and lure businesses.

Key Facts and Figures:

  • The unemployment rate in Puerto Rico was 14% in Dec. 2012 compared with 10.2% in Nevada and Rhode Island, the states with the highest unemployment.
  • Puerto Rico’s GDP in 2010 was $16,300, about the same as Botswana or Belarus.
  • Puerto Rico has lost some of its manufacturing base to low-wage countries like China and the Dominican Republic.
  • The law takes advantage of the longstanding interaction between the tax codes of the U.S. and Puerto Rico.
  • Under laws previously passed by Congress, all income earned in Puerto Rico by island residents is exempt from U.S. taxation.

Take Away #4: By moving to Puerto Rico, wealthy Americans can transform potential capital gains into untaxed income.

Key Facts and Figures:

  • Those individuals can transform potential U.S. capital gains income taxed at up to 23.8% into untaxed Puerto Rican income.
  • Those individuals must pass residency tests, including spending 183 days a year in Puerto Rico and having social and personal connections on the island.

Take Away #5: By contrast, renouncing U.S. citizenship by moving to another country is much more punitive for wealthy taxpayers.

Key Facts and Figures:

  • Those individuals must surrender their U.S. passports.
  • They must also pay an exit tax on the value of unrealized capital gains.
  • As a simplified example, someone giving up citizenship who has $100 million in untaxed stock gains could pay $23.8 million upon departure.

Take Away #6: Despite the potential tax advantages, the wealthy Americans considering a move to Puerto Rico should be wary.

Key Facts and Figures:

  • University of Puerto Rico professor of economics claims that for wealthy Americans, spending half a year in Puerto Rico’s third-world environment would be like spending half a year in a minimum-security prison.
  • The tax breaks enjoyed in the fiscal paradise are at the heart of the long-term fiscal crisis and economic stagnation the territory suffers.

Take Away #7: Puerto Rico’s use of the law to lure away wealthy tax payers is due to a struggling economy and its unresolved status between statehood and independence.

Key Facts and Figures:

  • Puerto Rico’s non-voting commissioner, Pedro Pierluisi represents residents in Congress and caucuses with House Democrats.
  • Pierluisi said, as a state Puerto Rico would get more federal funding, which would be an acceptable tradeoff for bringing residents’ income under federal income tax.
  • “Short of statehood, this is what you do,” he said.

Take Away #8: Puerto Rico’s separate tax system makes it different from several other U.S. territories and attempts to lure U.S. tax payers may prompt Congress to consider harmonizing the tax rules.

Key Facts and Figures:

  • U.S. territories like Guam, the Virgin Islands, and Northern Mariana Islands all use what is called a “mirror code”.
  • Using the “mirror code” simply means they use the U.S. tax code but substitute the name of the territory each time the law says United States.
  • The District of Columbia is treated generally like a state for tax purposes.
  • The Virgin Islands tried to lure hedge-fund managers more than a decade ago, using authority Congress granted to encourage economic development.
  • That attempt fizzled after Congress changed the law in 2004 and the IRS began auditing more aggressively.
  • Harmonizing the tax rules of the territories could be something to look at if Congress and the president undertake comprehensive tax reform.
  • Alternatively, if Puerto Rico maintains a separate tax system, that could be conditioned on accepting certain rules to prevent tax evasion.

Take Away #9: The hybrid system of Puerto Rican taxation has implications for companies as well.

Key Facts and Figures:

  • Until 2006, the U.S. offered companies a credit against U.S. income taxes for investments in the territories.
  • After that break expired, companies restructured their Puerto Rican operations to take advantage of its foreign jurisdiction for tax purposes.
  • Companies also have access to the U.S. market, patent protection and the U.S. legal system.
  • Companies like Amgen Inc., Pfizer Inc. and Microsoft Corp. receive local tax benefits from their operations on the island.
  • As with profits in another country, the companies can earn and leave money in Puerto Rico without paying U.S. corporate income taxes.
  • Senator Carl Levin said, Microsoft’s method of routing profits through Puerto Rico saved the company $4.5 billion over three years.

Take Away #10: For U.S. lawmakers concerned about the budget deficit, the Puerto Rico law could be a boon.

Key Facts and Figures:

  • A legislative attempt to prevent Paulson and others from tax-free moves to Puerto Rico could generate revenue for the U.S. Treasury.

*To view original article from www.bloomberg.com click here.

Filed in: Economy, Latest

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