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How Puerto Ricans Are Fighting Back Against Using The Island As A Tax Haven

When you own stock of a private company other than a Puerto Rican company, only a portion of your gain is Puerto Rican source. That portion is the amount of time you are a bona fide resident of Puerto Rico divided by the total amount of time you’ve held the stock. First, remember that you must be a bona fide resident of Puerto Rico for an entire taxable year before you get these benefits at all. There’s a special exception that will allow you to use the Puerto Rico tax benefits immediately upon moving there in certain circumstances, but this exception requires you to live in Puerto Rico for at least 3 years. So, if you live in the US and you operate a business that you hold through a Puerto Rican corporation, that Puerto Rican corporation is ETBUS and therefore subject to US tax on at least a portion of its income. Then, a non-US corporation that’s ETBUS is subject to US tax on its income that’s “effectively connected” with the conduct of the trade or business within the US.

3 of these top 10 global tax havens, Bermuda, British Virgin Islands and the Cayman Islands are not ranked by the IMF or the World Bank in their GDP-per-capita tables. In a letter to him the group recommended Ireland not adopt article 12, as the changes “will have effects lasting decades” and could “hamper global investment and growth due to uncertainty around taxation”. The letter said that “keeping the current standard will make Ireland a more attractive location for a regional headquarters by reducing the level of uncertainty in the tax relationship with Ireland’s trading partners”. Gabriel Zucman’s analysis differs from most other works in that it focuses on the total quantum of taxes shielded. He shows that many of Ireland’s U.S. multinationals, like Facebook, don’t appear on Orbis (the source for quantitative studies, including CORPNET’s) or have a small fraction of their data on Orbis . Zucman, Tørsløv, and Wier advocate profitability of U.S. corporates in the haven as a proxy.

The Puerto Rico Incentives Only Work if you Actually Live in Puerto Rico

That September, the Trump administration announced almost $13 billion in new aid to repair Puerto Rico’s hurricane-ravaged electrical grid and schools. Most notably, PROMESA created a seven-member financial oversight board appointed by the White House that was granted full control of Puerto Rico’s finances. It also created a debt restructuring process similar to Chapter 9 that governed negotiations with creditors to reduce debt payments. Unable to borrow on global markets, https://quick-bookkeeping.net/ Puerto Rico was in economic limbo for years after turning over its budget to an independent control board appointed by Washington as part of a plan to restructure its debts. Making matters worse, in 2019, U.S. authorities arrested former high-level officials in a corruption scandal, leading to the resignation of Governor Ricardo Rosselló. By 1917, Congress had granted Puerto Ricans U.S. citizenship, as the newly created Panama Canal increased the island’s strategic value.

How is tax treated in Puerto Rico?

Residents of Puerto Rico are required to pay most types of federal taxes. Specifically, residents of Puerto Rico pay customs taxes, Federal commodity taxes, and all payroll taxes (also known as FICA taxes, which include (a) Social Security, (b) Medicare, and Unemployment taxes).

During his presidential campaign, Biden released a plan to ease Puerto Rico’s multilayered crisis, including by facilitating reconstruction; reducing the territory’s debt burden; and expanding access to and funding for social services. In April 2021, Biden freed up more than $8 billion in disaster-relief funding for Puerto Rico, and in July, his administration revived a White House task force to better coordinate federal policy toward the island. In the days following Hurricane Fiona, Biden declared an emergency, dispatched hundreds of federal employees to the island, and announced that Washington would cover a month of aid spending. It used to be that you could set up a Puerto Rican company under Act 20, qualify for the 4% corporate tax, and then become a Puerto Rican non-resident, thereby exempting yourself from all personal income tax requirements in Puerto Rico. The Act 20 company will only pay 4% corporate tax, and your main business can write off the expenses.

The “Knowledge Economy”

Given the choice between paying federal income tax and casting a vote for a president, which doesn’t matter anyways due to the electoral college, a Puerto Rican will always vote to keep more of what they earn. The only exception to this rule are welfare recipients, something we have too much of on the island. Of course, there was still money to be made in providing offshore services. And the purpose of those arrangements is avoidance, so scandals are a recurring feature of the business. Between 1994 and 2002, former Chilean dictator Augusto Pinochet laundered nearly $12 million through two offshore shell corporations in the Bahamas. In 2006, U.S. authorities indicted the president of a Bahamas-based offshore investment firm for laundering more than $1 billion in funds derived from tax evasion, drug trafficking, securities fraud, and bank fraud.

How do people avoid taxes in Puerto Rico?

Individuals who are bona fide residents of Puerto Rico are eligible for a possession-source income exclusion, and therefore not subject to U.S. income tax on work or business income sourced from within the territory.

Heavy rains in communities, already weakened by the earthquake and subsequent aftershock, caused homes to collapse. The storm also left some 150,000 without water and cut power to more than 400,000 homes, businesses and hospitals. “Everyone is in a constant state of emergency,” said Marieli Grant, a Mercy Corps team member based in San Juan. Just like Detroit, Greece and other places rocked by the recession and government mismanagement, Puerto Rico’s debt ballooned over the last decade, further exacerbated by colonial status and expiring tax incentives. The Paradise Papers are a massive data leak from some of the world’s most secretive tax havens.

The Ongoing Question of Puerto Rican Status

More traditional corporate tax havens, which do not always have the level of sophistication and skill in encoding IP BEPS tools into their tax regimes, will fall further behind. Modern corporate tax havens, such as Ireland, Singapore, the Netherlands and the U.K., are different from traditional “offshore” financial centres like Bermuda, the Cayman Islands or Jersey. Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to the haven; as long as these jurisdictions have bi-lateral tax treaties How Puerto Ricans Are Fighting Back Against Using The Island As A Tax Haven with the corporate haven. This makes modern corporate tax havens more potent than more traditional tax havens, who have more limited tax treaties, due to their acknowledged status. The United States does not impose any federal income tax on U.S. citizens who are residents of the island and profit from Puerto Rican sources. Adding Puerto Rico to the U.S. state register would require these citizens residing and working in Puerto Rico to pay federal income taxes, significantly boosting the Federal Reserve’s annual revenues.

All the while, rich gringos are walking around the island and paying no or very little tax. Your “tax home” is basically the locus of your economic activity. So, you can’t be commuting back and forth between Puerto Rico and your office—you need to move the office to Puerto Rico. Sometimes you’ll see offshore gurus and Puerto Rico promoters say that you only need to spend at least 183 days per year in Puerto Rico.