New PR excise tax boosts US firms

By CB Online Staff / Caribbean Business

May 2, 2011

U.S. pharmaceutical companies operating in Puerto Rico, including Amgen and St. Jude Medical, are posting improved results and lower federal tax bills because of the island’s new excise tax on manufacturers.In a statement, Amgen said its first-quarter performance was boosted by the new excise tax affecting its operations in Puerto Rico.

While the Fortuño administration has trumpeted that development, non-U.S. competitors could face a disadvantage compared to their stateside-based counterparts.

The U.S. Internal Revenue Service (IRS) announced in late March it will allow U.S.-based parent companies of Puerto Rico manufacturers subject to the new local excise tax under Law 154 to claim a federal tax credit against the six-year levy.

The island government, local manufacturers and multinational companies had been awaiting word from the IRS since the new tax was imposed with the passage of Law 154 late last year. The Washington, D.C.-based Steptoe & Johnson law firm, hired by the Fortuño administration to analyze the issue, had concluded the excise tax could be used as a dollar-for-dollar tax credit against federal taxes owed. That prompted the local government to request a ruling on the matter from the IRS in early November.

The IRS finally sent word that it will not question the creditability of the local tax against federal taxes under Section 903 of the U.S. Internal Revenue Code as the agency and the U.S. Treasury Department continue to analyze the impact and legal issues of the matter.

Puerto Rico government officials said the decision by the IRS will lower the tax liabilities that companies are subject to under Law 154. Some companies are reporting lower tax bills overall due to the federal government’s treatment of the new local excise tax.

Amgen’s 2011 first quarter of results were positively impacted by the recently enacted Puerto Rico excise tax associated with the company’s manufacturing operations in Puerto Rico. This excise tax is accounted for as a manufacturing cost that is capitalized in inventory and expensed when the products are sold. For U.S. income tax purposes, a significant portion of the excise tax results in a foreign tax credit that is recognized when the tax is paid.

“This difference in the timing of recognizing the expense and the applicable tax credit positively impacted the first quarter of 2011 financial results,” Amgen said in its first-quarter earnings report.

With respect to other guidance, Amgen now expects the adjusted tax rate for 2011 to be in the range of 15 percent to 16 percent.

“This reflects the impact of the foreign tax credit associated with the newly enacted Puerto Rico excise tax,” the company said.

The local tax reform is initially to be funded in large part by Law 154, which levies a controversial, six-year excise tax on the offshore affiliates of island manufacturing operations, a move that manufacturing and business groups roundly criticized. Gov Luis Fortuño, however, has said the tax is being implemented to cause the operations the least harm possible.

The first payments of the new excise levy slapped on manufacturers under Law 154 were due by Feb. 15 and brought in $108.7 million. Although that haul was just shy of estimates, it played a big role in helping the Treasury Department boost net revenue to the general fund by 13 percent for the month despite cuts in individual and corporate income-tax collections under tax reform. The second payments, due March 15, reached $125 million.

Law 154 initially levies a 4 percent excise tax on goods and services, reaching at least $75 million, sold by companies on the island to overseas affiliates. It will be progressively cut to 3.75 percent in 2012, 2.75 percent in 2013, 2.5 percent in 2014, 2.25 percent in 2015 and a 1 percent tax in 2016, the final year the tax will apply. The Fortuño administration projects that next year the excise tax will represent net income to the local Treasury Department ranging from $1.4 billion to $2 billion. Those revenues are expected to decline in the following five years to $360 million in 2016.

Some trade groups and business leaders had come out against the new excise tax on local production sold to affiliates, which took effect Jan. 1, saying it will drive up the cost of doing business on the island and dry up manufacturing investments here. The Fortuño administration has mitigated the impact of the tax with the inclusion of tax credits that actually seek to discourage layoffs and encourage research-and-development (R&D) activity by the corporations on the island.

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