Parading to Puerto Rico

Some companies have discovered that the commonwealth has tax advantages without the political pressure that comes with moving to non-U.S. tax havens.
John P. Mello Jr.May 5, 2004

In March, Tyco International Ltd. came under heavy criticism for its decision to maintain its incorporation in Bermuda. But some companies have discovered a locale that has tax advantages without the political pressure that comes with moving to non-U.S. tax havens: Puerto Rico.

While Puerto Rico’s corporate income tax is similar to that of the United States — ranging from 22 to 39 percent — industries that the commonwealth’s government wishes to attract to the island receive tax incentives, according to Rolando Lopez, a partner with KPMG LLP in San Juan. Those industries include manufacturing, tourism, agriculture, and exportation of goods or services. Companies in these industries, he adds, may qualify for a rate on taxable income as low as 2 percent and no distribution tax, as well as a 60 percent exemption from the tax on gross receipts.

The tax enticements have lured a number of pharmaceutical, medical-equipment, and biotech companies. Sixteen of the 20 top-selling drugs in the United States are made on the island, as are 50 percent of all pacemakers and defibrillators. More than $2 billion worth of investment in facility development and construction for the manufacture of biotech bulk active ingredients is currently under way, according to the Puerto Rico Industrial Development Co. (PRIDCO).

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Companies should be cautious about chasing tax benefits to reduce costs, warns Brian E. Andreoli, a partner with Duane Morris LLP in New York. “Tax benefits can disappear overnight,” he says. Smart companies should open shop in a location because it makes business sense to do so, and treat tax benefits as a bonus, he observes.

Apart from the tax break, there are other advantages to making capital investments in Puerto Rico, according to PRIDCO senior financial analyst David M. Press. There’s no currency-exchange risk, he notes, and it’s a U.S. custom zone, so it is less difficult to move products into markets on the mainland. The capital, San Juan, was also recently named by KPMG as the least-expensive place to do business among 24 U.S. and affiliated cities with populations exceeding 1.5 million.