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OOffshoreffshore ffirmsirms ssubjectubject ttoo ppermanentermanent ttaxationaxation uundernder nnewew ‘‘SourceSource RRule’ule’ A multinational fi ght expected over Puerto Rico’s precedent-setting new tax By John Marino Luis Fortuño pages 20-27 Governor of Puerto Rico TOP STORY INSIDE SPECIAL FEATURES Agriculture program New law eases commercialization of UPR patents page 60 saves dollars and jobs in island Camarero Racetrack to be powered by chicken industry $8.4 million renewableenergy plant page 8 page 2 Puerto Rico ranks among Top 10 island destinations in the world page 30 For up-to-the-minute local, national, international and economic news in English, go to caribbeanbusinesspr.com now on 20 CARIBBEAN BUSINESS THURSDAY, NOVEMBER 4, 2010 Puerto Rico reaches offshore to fi nance its tax reform New tax strategy called a threat to multinational business model RREACHEACH all the Chairmen, Presidents, General Managers, Financial Offi cers, Executives, Supervisors, Gov. Luis Fortuño, left center, confers with members of his Tax Reform Commission, which worked for months on the proposal unveiled by the governor last week. Business Owners and Licensed Professionals BY JOHN MARINO found to be sourced to Puerto Rico Also, “if the excise tax does not the Source Rule is an income tax on in Puerto Rico. [email protected] under the new regulation, the experts apply for any reason, then the Source the offshore fi rm that does business added. Rule applies,” the legal opinion with an island affi liate and the excise In CARIBBEAN BUSINESS your ad than 100,000 readers. In a daily, they nder changes to the island’s Moreover, while the excise tax states. “If purchasers were to succeed tax is “in lieu” of that income tax. will be seen for at least one week as are maybe 10% of the readers. UInternal Revenue Code that expires after six years, and reduces in a challenge to the excise tax, this “The Source Rule should be con- accompanied a new tax enacted by down over that time to 1% in its last would simply subject the purchasers sidered part of Puerto Rico’s gen- it’s being passed from Executives Gov. Luis Fortuño last week, the Call your advertising agency or our year, the amended “Source Rule,” to the Source Rule instead.” erally applicable Corporate Income to Managers and Supervisors, and in Puerto Rico government would be and the tax responsibility it spells Because the law states that either Tax,” the analysis states. many cases saved for reference. Senior V.P. Sales, Manoly Ponce at able to permanently levy income tax- out, is permanent, experts say. the Source Rule or the excise tax On Oct. 25, the Saturday during 787-728-3000, ext. 4480/3540 or es on offshore fi rms benefi ting from “The Source Rule applies to in- will apply to the offshore affi liated which the Legislature passed the 95% island production of goods and ser- come accruing after Dec. 31, 2010. company, once the excise tax ex- legislation, top government offi cials, Business people are of our more email: [email protected] vices, according to tax experts and a The Source Rule does not contain pires in six years, the Source Rule including Government Development legal opinion of the recent changes. any expiration or ‘sunset’ provision. should apply to the fi rms, said Carlos Bank President Carlos García, met THIS IS NO TIME TO WASTE! While administration offi cials have It is anticipated that the Source Rule Bonilla, chairman of the Puerto Rico with island tax attorneys to brief highlighted the temporary nature of will be a permanent change to Puerto Manufacturers Association (PRMA) them on the development. There a proposed 4% excise tax for fi rms Rico’s law,” states a legal opinion Tax Committee. was confusion among the offi cials with gross sales above $75 million for the government of Puerto Rico by The main thrust of the legal opin- over whether the Source Rule was annually to offshore affi liates, fi rms the Steptoe & Johnson law fi rm, one ion is aimed at arguing why the ex- permanent, according to one par- with lower sales will be exposed to of the top fi rms in Washington, D.C., cise tax should be fully credible for ticipant, but Philip R. West, the tax the normal 39% corporate income that was obtained by CARIBBEAN federal taxes, and the crux of the ar- attorney who developed the new tax Smarter advertising for better results at less cost. tax on the portion of their income BUSINESS. gument consists of establishing that Continued on next page 60 CARIBBEAN BUSINESS TECHNOLOGY THURSDAY, NOVEMBER 4, 2010 FRONT PAGE 21 CARIBBEAN BUSINESS THURSDAY, NOVEMBER 4, 2010 New law eases commercialization of UPR patents Continued from previous page Then the Irish, Singapore and Spain may try to emulate Puerto Rico,” said BY JOSÉ ALVARADO VEGA with Law 150, enacted last month by Gov. “I’m elated,” he told CARIBBEAN BUSINESS. initiative, clarifi ed that the Source Bonilla, the PRMA Tax Committee [email protected] Fortuño, which could accelerate the entry of “It is about time; now the university will be able Rule was permanent and would ap- chief. “Puerto Rico is saying it has the UPR system into the knowledge economy. to put its patents to use.” ply to all companies after the six-year the right to impose a tax on a for- n early 2006, Raphael Raptis, a professor of The law amends the Government Ethics Law Since getting off the ground in 2007, IFN excise tax phases out (see sidebar). eign company that has never been Iinorganic chemistry at the University of Puerto (Law 12 of July 24, 1985) to lift the prohibition research has generated “at least” 20 patents, with The private sector is reportedly in Puerto Rico. This is something Rico (UPR) Río Piedras campus, and his col- against UPR professors and researchers working 11 of them produced in 2009 alone, said Gómez, mulling a push for clarifi cation and totally new.” league, Ricardo González Méndez, a biology as consultants for private fi rms the UPR licenses who noted that none have been put to commercial an amendment stipulating a sunset No other country has a similar tax, professor at the UPR Medical Sciences campus, to develop patented technologies, or starting up use yet. He said the Massachusetts Institute of clause for the Source Rule as well, West told the island’s tax attorneys, used cutting-edge bio-nanotechnology research their own commercial ventures. Technology generates up to 20% of its income according to one account. Admin- but he expressed confi dence that to develop a safer contrasting agent for patients Law 150 allows the UPR to draw up contracts from royalties. istration offi cials have declined to Puerto Rico has the ability to levy undergoing MRI scans. with professors and researchers to facilitate the The Senate bill’s justifi cation states that in discuss the technical aspects of the the tax and that it would qualify for Raptis and González developed a contrasting transfer of technology and commercialization of 2007, a total of 194 nonprofi t institutions in new tax. a federal tax credit. West told the agent based on iron compound nanoparticles intellectual property approved by the university the United States reported $2.69 billion in Around 30 fi rms are expected to be tax attorneys that discussions with that can safely be absorbed by the body. The president, who must submit an annual report to royalties. taxed under the excise tax and an- the Internal Revenue Service (IRS) agent in use contains gadolinium, a heavy metal the Government Ethics Offi ce on such transac- “You can have an industrial base built around other 30 fi rms under the Source Rule, “have been favorable but are at a that has been linked to health problems. tions approved during the year. such patents,” said Gómez, noting the $150 mil- for a total of 60 fi rms, Bonilla said. critical point in the discussion,” one The researchers quickly set up a start-up com- Manuel Gómez, head of the UPR Resource lion a year in royalties the University of Florida As a general rule, nonresident cor- participant recalled. The fi rm is be- pany—FE8—in March 2006 to further develop Center for Science and Engineering and co- receives from sales of Gatorade, invented there porations are not subject to Puerto lieved to have asked for an IRS rul- the technology for commercial use. Four years director of the UPR-based Institute for Functional in 1965. Rico taxes if they are not engaged ing on the matter. later, however, their patented invention is no Nanomaterials (IFN), said the new law will not Charles E. Seeney, president & CEO of in trade or business here. Under cur- As soon as the affected corpora- closer to benefi ting patients. only allow the university to fully contribute to the Oklahoma City-based NanoBioMagnetics Inc., rent law, tax authorities will subject tions found out about the new tax, “We have a company, but it is just on paper,” establishment of a homegrown high-tech indus- and a member of the IFN advisory board, said a corporation to local taxation if it they immediately began to quantify Raptis told CARIBBEAN BUSINESS. try, but also will bring in much-needed patent- that between 2% and 10% of technology sales receives income deemed to be attrib- Gov. Luis Fortuño Government Development Bank its costs, to re-examine their invest- The fate of such research could change radically royalty-fee income.