The Policy Report prepared and published by Espacios Abiertos’ (EA) team quantifies and analyzes the effect of the Global Minimum Tax of 15% and the opportunities and risks that represent for Puerto Rico, whether or not to adopt legislation, which would allow PR to capture said monies and invest them in a such a way that our industrial base maintains its competitiveness and some 100,000 jobs are preserved.

In essence the EA study:

• quantifies GMT’s income potential at around $3.8 billion annually,
• raises the need to take action before January 2025 to prevent that money (about $3.5 billion) from being claimed/captured by other jurisdictions,
• and among other things, it proposes the creation of a commission of local and international experts to help define how to invest this income  with the objective of sustaining the current -and future- industrial base of PR in accordance with the new international standard.

Over 140 jurisdictions have implemented the GMT, which has rapidly turned into an international standard.   The global minimum tax establishes a minimum tax rate of 15% for corporations with an annual income greater than 750 million euros.

Starting in 2025, this minimum tax, also known as Pillar II, will also impact subsidiaries in Puerto Rico of corporations whose parent companies have other subsidiaries in countries that have already signed the agreement promoted by the OECD and the G-20.

Currently, in the aggregate, multinationals and foreign corporations in Puerto Rico are taxed at an effective tax rate of 2.43%.

On the other hand, the Undertaxed Profits Rule (UTPR) allows that, as of January 2025, any country that is a signatory to the international agreement can claim from another jurisdiction that has not adopted the Global Minimum Tax, the difference in the rate equivalent to 15 %.  Difference that in the case of Puerto Rico is equivalent to 12.57%.

It is for this reason that it is imperative to adopt legislation that allows Puerto Rico to capture that money that would otherwise go to the coffers of other countries.  The amount is significant. The policy report indicates that more than $3.5 billion are in play for Puerto Rico if no action is taken, since said amount could be claimed by others jurisdictions.

This is not a matter of a tax increase that Puerto Rico will be imposing on these corporations, because they will have to pay the GMT of 15% here or abroad.  So, the issue to be defined is who will capture that money? If we do nothing, the country of origin or the country of some subsidiary/affiliate will collect it.  In order for that money to stay in Puerto Rico, the local government must take action.

Espacios Abiertos’ public policy report titled, Global Minimum Tax and its Potential Effects in Puerto Rico: A Window of Opportunity, has the objective of: making transparent information from various specialized sources for which the general public has limited access; provide access to knowledge and data; and promote an open discussion that allows civil society in Puerto Rico to take advantage of the opportunities presented by the GMT, mitigate the risks and guarantee a sustainable long-term fiscal policy.

As residents of the island we do not pay federal income taxes, but we do pay the same federal medicare, social security, self-employment, unemployment, customs, and merchandise taxes as residents of the states.  In 2022 the federal taxes paid by the residents of Puerto Rico to the US added up to $4.8 billion dollars.  Nonetheless, residents of Puerto Rico do not get the same federal benefits.  For example: Medicare and Medicaid have a spending cap, we are excluded from the SSI and federal EITC, and annually receive $1.6 billion less for nutritional assistance (through NAP instead of SNAP).

Puerto Rico does receive more federal expenditures than it pays in federal taxes, but so do half of the states!!!!  Which include: Michigan, Idaho, Louisiana, Oklahoma, Oregon, Montana, Hawaii, Vermont, Maryland, Pennsylvania, Maine, Wisconsin, Alabama, Arizona, Mississippi, West Virginia, Virginia, New Mexico.

Moreover, seven states have a greater deficit in net federal expenditures per capita than Puerto Rico, these are: Connecticut, Indiana, South Carolina, Alaska, Minnesota, Kentucky and North Dakota.

Download here the one pager fact sheet.

See graphs below which reference data from IRS, USAspending.gov and Espacios Abiertos analysis:

Access Espacios Abiertos‘ most recent report/policy brief on Puerto Rico’s Earned Income Tax Credit authored by Daniel Santamaria Ots, Enrique Colón Bacó and José Zavala thru this link.  Excerpt below.

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While the municipalities’ audited statements reflect a total of $539 million in unearned revenue from tax expenditures

San Juan, March 19, 2024 – The fourth and most recent Tax Expenditure Report published by the Treasury in Puerto Rico establishes that preferential rates and corporate exemptions constitute $22 billion of the $24 billion in tax expenditures reported in Puerto Rico and the trend continues to increase.

Against this backdrop, and considering the great weight of preferential treatment and tax exemptions for foreign corporations as an incentive to do business in Puerto Rico, Espacios Abiertos (EA) warns of the effect the Global Minimum Tax (GMT) that is being discussed around the world could have on the island’s economy.

On the other hand, Espacios Abiertos’ analysis presents, for the first time, a look at fiscal expenditures at the municipal level.

The non-profit, independent and non-partisan organization analyzed the official report titled Puerto Rico Tax Expenditures 2024 (PRTER) using the standards for audited statements of the Governmental Accounting Standards Board (GASB), which sets accounting and financial reporting standards for state and local administrations in the United States. It also analyzed the audited financial statements of the municipalities, in compliance with GASB 77, a standard that came into force December 31, 2015.

EA’s analysis highlights the need for greater transparency, detail, and granularity in the information about the impact of tax benefits, so that the report, says the report published by economist Daniel Santamaría Ots, director of research at EA.

“Our analysts found that the most recent tax expenditure report of the government of Puerto Rico lacks updated data, necessary for a thorough evaluation and cost-benefit analysis of each of the credits, exemptions and incentives granted,” said Wilmarí de Jesús, Open Space Analyst.  “Accurate information is essential for policymakers, government officials, and citizens to make informed and timely decisions. This ensures that the effects of tax exemption laws are properly assessed and that public resources are managed effectively and efficiently,” de Jesus said.

“Since 2022, Espacios Abiertos has insisted on the need to present PRTERs in an open data format that allows the analysis of these measures with complete, reliable and easy-to-process data,” said Santamaría Ots.

The federal budget law of 1974 defines tax expenditures as the loss of government revenue as a result of laws that reduce or even eliminate the normal tax liability of a group of taxpayers or some defined economic activity. This preferential treatment can take several forms, such as exclusions, exemptions, or special deductions that reduce taxable income; or there may be credits, decrees, deferrals, and special tax rates provided. By causing the reduction of government revenues, they are designated as “expenses” based on the premise that a dollar not entering the treasury is economically equivalent to a dollar of public spending, which is why the term “tax expenditures” is used.

 EA’s Findings on the PRTER 2024 Report

• 52% ($22,222.80 million) of the unearned income from tax expenses in 2021 corresponds to corporate contributions.
• In 2021, a total fiscal expenditure of $24,538.60 million was projected, with 67.28% ($16,510.50 million) going to economic development.
• In 2021, the government bet on indirect or tax expenditures over direct expenditures in areas such as economic development, retirement, and housing.
• In the 2024 PRTER, 61.46% of tax expenditures are estimated, showing an improvement over the 53.7% of the 2023 PRTER. However, Puerto Rico is still below the world median in terms of the share of tax expenditures for which estimates are provided.

EA’s Key Findings on Municipal Tax Expenditures

1. The lack of centralized visibility on tax expenditures at the municipal level compared to state-level reporting is highlighted. Currently, 54 of the 78 municipalities (69.23%) contain complete or partial estimates of tax expenditures.
2. At least $539,163,263 million in additional tax expenses to the $24,538 million identified in the PRTER 2024 are no longer accrued.
3. Of the $539.1 million of unearned income, at least $226.3 million (41.98%) is in personal property taxes, followed by $172.4 million (31.9%) in real property taxes.
4. State laws play a dominant role in enabling 86.84% of total tax expenditures, equivalent to $468,228,427 million.
5. The municipality of Carolina leads with $146,266,526 in unearned revenue, followed by Guayama with $59,580,476 and Vega Baja with $36,601,553.
6. In six cases (Guayama, Juana Díaz, Vega Baja, Carolina, Gurabo and Cidra) tax expenditures exceeded their municipal budget. In 11 cases, tax expenditures exceed 50% of the municipal budget.

EA Recommendations

• Legislate to ensure detailed annual reports on state and municipal tax expenditures that comply with standards and best practices, including specific information on tax exemptions granted, laws supporting them, and unearned income figures.
• Include detailed reports on tax expenditures in the government budget approval process so that legislators and government officials have solid information to make decisions on resource allocation and the continuation of tax breaks. In this way, transparency and effective fiscal management are promoted.
  • In 2023, the tax expenditure report was published on June 30, 2023, one day after the approval of the 2023-2024 budget by the Legislative Assembly, and six months after the deadline set by the Financial Oversight and Management Board for Puerto Rico for the Government’s Certified Fiscal Plan.
• Use up-to-date data in the estimation of fiscal expenditures for greater accuracy and actual effectiveness of the projections.
• Include municipal tax expenditures in all audited municipal statements, in accordance with the provisions of GASB 77.

“By ensuring that all the necessary data is available in the appropriate forms, we will be able to have detailed information on tax expenditures, which will result in better evaluations of the effectiveness of fiscal policies and that the necessary adjustments can be made,” conclude de Jesús.

In 2017, Espacios Abiertos began to insist on the need to know, disseminate and analyze fiscal expenditures in Puerto Rico. Between 2018 and 2019, it took a case to the Supreme Court seeking disclosure of these expenses. In September of 2019, for the first time, the government of Puerto Rico published a report on tax expenditures, something that the federal government, the states, and many countries had done since the 1970s. To date, four fiscal expenditure reports have been published in Puerto Rico, titled Puerto Rico Tax Expenditure Reports (PRTER). 

Access the report’s English version here.

To access the full report authored by Martín Guzman and Daniel Santamaria-Ots, in its English version, click here.

Excerpt from Espacios Abiertos Policy Report: Overview of Puerto Rico’s Recent Fiscal, Debt, and Growth Policies

“Puerto Rico’s main challenge is finding a way to finally escape from a destabilizing economic dynamic that has featured a long-lasting economic decline and a crisis of population outmigration. The unsustainable debt burdens had contributed to that dynamic. The debt restructurings were based on controversial assumptions about the effects of fiscal policies and structural reforms on GNP growth and about the global economic environment; some, if not all, of these assumptions, are already obsolete. While debt will surely merit more attention soon, the most pressing urgency is articulating a growth strategy that delivers a chance for prosperity, consistent with the financing constraints that the Island faces. The role
of the state will be critical. The question of what fiscal consolidation is consistent with a prosperous economy and what set of fiscal and productive policies should be adopted to achieve such a consolidation remains open.

So far, the FOMB’s growth strategy for Puerto Rico can be characterized as a risky bet—with a large downside, as the losses from cutting investments in knowledge and from disinvesting in state capacities are real, while the gains from structural reforms are dubious at best.

In sum, Puerto Rico’s growth strategy must be at the center of the public debate.”

This is a mandamus action for access to public  records. (Pet. App. 173a.) The Board claims, as a  defendant in a litigation in federal court, sovereign  immunity from suit in the exclusive federal forum. CPI  and the courts below concluded that PROMESA  abrogated that immunity. But there’s a fundamental  issue that makes resolving that disagreement  unnecessary: a mandamus action to compel  performance of ministerial duties is not an action against a sovereign at all.

I. That was the original understanding of the  Constitution, as informed by English common law, and the practice of this Court and state supreme  courts just after the Founding. Writs evolved out of the  overlapping jurisdiction of royal, feudal, and  communal courts that co-existed in the first centuries  following the Norman Conquest. They began as letters  from the King, with his seal affixed, sometimes  bearing the Latin phrase, vobis mandamus—“we  command you.” In time, the Court of King’s Bench  heard petitions for writs, but the legal fiction persisted  that the King himself presided. In petitions for  mandamus, the complainant sues in the sovereign’s  name.

This tradition was well-known to the American  colonists, and early state supreme court decisions  duplicated it, often explicitly citing the King’s Bench  or English treatises to support mandamus power. In some of its earliest and most important decisions, this  Court did likewise. After Marbury, the scope of  mandamus was clear: it would lie to compel a purely  ministerial duty, like the delivery of a public record,  but federal courts were powerless to order officials to  reach a particular decision within their discretion to  make.

After the Civil War, the Court held, and in other  cases discussed, that mandamus could issue in federal  court against a state official to comply with a  ministerial duty created by state law. Pennhurst cast  doubt on, but stopped short of, overruling those cases.

See Pennhurst State Sch. & Hosp. v. Halderman, 465  U.S. 89 (1984). Puerto Rico, for its part, followed  Marbury in holding, for more than a century, that  mandamus could compel a government official to make  available a public record. Today, that ministerial duty  applies to records requests from anyone, not just a  party with a beneficial interest.

II. The traditional understanding of mandamus  supplies the most straightforward resolution here. The  Court does not have to decide whether Puerto Rico  enjoys sovereign immunity like a State does or  whether Congress abrogated that immunity. Because  the real parties in interest are Board members in their  official capacities, not the Commonwealth, this is not  an action against a sovereign barred by sovereign  immunity.

Mandamus is particularly appropriate here  because, if the Board were immune from suit, there  would be no remedy against it for the right to access  public records enshrined in Puerto Rico’s constitution  and statutes. It offends the dignity of sovereigns just as much to impose immunity the sovereign chose to  waive as it does to take away immunity the sovereign chose to keep. Depriving the sovereign of the power to  grant a remedy in the sovereign’s name contravenes  the principles of Pennhurst.

If sovereign immunity bars mandamus to compel  performance of ministerial duties under Puerto Rico  law, that will inject uncertainty into mandamus  proceedings in Commonwealth courts and in States  that use mandamus as a FOIA remedy in the absence  of an express statutory waiver of immunity. The Court should hold instead that there is no immunity defense  to mandamus for public records here and affirm.

Espacios Abiertos brief goes on to argue:

I. There Is No Sovereign Immunity from Mandamus Actions to Compel Performance of Ministerial Duties.

A. English Common Law Did Not Recognize Sovereign Immunity from Mandamus, Which Issued in the Sovereign’s Name.

B. The Court’s Opinions from Marbury to Pennhurst Find No Sovereign Immunity from Mandamus to Perform Ministerial Duties.

1. 1. Antebellum Decisions of This Court and State Supreme Courts
   2. The Postwar Era and Federal Mandamus Against State Officials
   3. Larson and Pennhurst Preserve the Ministerial Duty Basis for Mandamus

C. Puerto Rico Courts Issue Mandamus to Compel the Ministerial Function to Make Public Records Available

II.  Affirming on Mandamus Grounds Avoids Injecting Uncertainty into Access to Information Suits.

Access Espacios Abiertos full Amicus Brief to the United States Supreme Court here.

Access the full report (English version) authored by Policy Analyst Wilmarí de Jesús Alvarez, through this link.  View other links to related documents at the bottom of the page.

Excerpt from the Report: Recommendations

Accountability and monitoring of the return on investment

• The Puerto Rico Department of the Treasury should use the methodology specified in ARPA and the requirements specified in Law No. 41 of 2021 to quantify and report on the amount the public coffers reimburse in EITC and thereby resolve the confusion caused by the lack of uniformity in indistinctly reporting the amount disbursed and amount claimed.
• In order to ensure that any detail(s) in the next tax cycle can be rectified and, if necessary, amendment(s) may be made to the Puerto Rico income tax code with respect to the EITC, the local Treasury Department should publish an annual report on the impact of this measure before the close of the current legislative session or the beginning of the next tax cycle.
• The figures still to be reported by the Department of the Treasury are essential for confirming whether there was an excess disbursement of one hundred percent of the amount budgeted by the government of Puerto Rico. If this was the case, there must unquestionably be modifications to the controls established by the Department. In addition, and from the most favorable angle, this situation could suggest that Puerto Rico has the ability to budget up to an additional $200 million for the EITC, that is, $400 million per year, to incentivize formal work and relieve the financial insecurity of thousand of working families who earn less than $42,000 per year.
• Need to carry out a qualitative analysis, through public policy laboratories, collaborations with academia, and surveys of participants in the EITC, which will allow measurement of the effectiveness of the EITC in improving the poverty rate among families and increasing the labor participation rate.

Expansion of impact and improvement in efficiency

• Ensure that every household that files a tax return with the Department of the Treasury and is eligible for one, the other, or both credits (EITC and CTC) but does not apply, be notified of its eligibility and that in the case of the EITC (since it is locally designed and implemented), that credit be accredited or reimbursed automatically.
• Double the annual assignment of EITC moneys in the budget of Puerto Rico (to $400 million), with the federal government’s commitment to do the same (that is, assign up to $1.2 billion) in order to combat poverty, while at the same time incentivizing formal work and reducing the abysmal difference between the poverty rate in Puerto Rico and that rate in the poorest jurisdictions in the United States.
• Evaluate mechanisms that will allow, in collaboration with the IRS and within the existing legal and judicial order, the processing of the CTC by the Department of the Treasury from now on, in order to ensure agile disbursement of the credit for the universe of households that now file with the local government, as well as other families eligible locally for that credit.

Related links:

• Resumen de hallazgos (en español)
• Lecciones aprendidas (en español)
• Letter to the Secretary of the Treasury/Hacienda (in Spanish)

EA’s policy brief “The New Earned Income Tax Credit and its Impact on Poverty in Puerto Rico”, indicates that the local EITC has the potential to help around 420,683 people (216,393 taxpayers units) increase their levels of economic security, since in addition to the 54,920 taxpayers who would cross the poverty line, another 161,473 taxpayers would have the possibility of being less poor in economic terms.

Although there is still a long way to go to encourage formal work with decent wages in Puerto Rico, the credit—coupled with the increase in the minimum wage—points in the right direction. Espacios Abiertos will continue to evaluate the effectiveness of the new credit for work with the purpose of providing empirical evidence on its real impact on the living conditions of thousands of Puerto Rican families.

The potential increase in the number of taxpayers who could benefit from the new credit is due to three factors: the inclusion of young people between 19 and 26 years old (76,426 taxpayers), the entry of self-employed workers (13,238 taxpayers) and the expansion of the taxpayer base by increasing the maximum income limit of applicants for the new credit according to the new law (121,885 taxpayers) who did not qualify in 2019.

If we apply the parameters of the new credit that will be in effect in 2022, to the returns that were filed in the 2019 tax year,  211,549 taxpayers (349,152 people) could receive the credit in addition to the 254,757 taxpayers (496,149 people) who qualified in 2019, impacting in total a potential 466,306 taxpayer units (845,301 people) in Puerto Rico.

Using the demographic and socioeconomic composition of the 2019 taxpayer units, the credit could average approximately $1,800 per taxpayer.

Access the full report and executive summary through the following links:

• Download the public policy paper “The New Earned Income Tax Credit and its Impact on Poverty in Puerto Rico“ (2021)
• Download the executive summary “The New Earned Income Tax Credit and its Impact on Poverty in Puerto Rico“ (2021)
• Descarga el informe de política pública “El nuevo crédito por trabajo y su impacto en la pobreza en Puerto Rico” (2021)
• Descarga el resumen ejecutivo “El nuevo crédito por trabajo y su impacto en la pobreza en Puerto Rico” (2021)