Perhaps not surprisingly to those familiar with the tropical island, manufacturing remains a key driver of economic activity in Puerto Rico. Indeed, manufacturing accounts for 45% of Puerto Rico’s GDP (compared to 11% in the U.S.) and over 20% of the island’s jobs. Many U.S. multinational companies, particularly in the pharmaceutical industry, have chosen Puerto Rico as their home for manufacturing operations.
Why? There are five main reasons.
Some would argue that this “favorable” business climate was somehow muddied by Act 154, commonly referred to as the 4% excise tax. Generally speaking, the law imposes a tax on the affiliates of Puerto Rican manufacturers that purchase goods and services from the Puerto Rican manufacturers.
To the contrary, according to the law’s drafters and Puerto Rico government, the tax burden, if any, on U.S. companies is minimal because Act 154 taxes would offset any U.S. tax liability by the same amount. On March 30, 2011, the IRS issued Notice 2011-29 to address this issue. Although the Notice did not offer a legal opinion, it stated that the tax was “novel” and that the IRS would have to study it. Meanwhile and until further notice, U.S. manufacturers in Puerto Rico could continue to credit the tax against their U.S. tax liabilities. Four years later, there has been no further notice by the IRS.
Low operational costs, a strategic location and a favorable tax climate have lured manufacturers to Puerto Rico for decades. While we are seeing increased competition from China and Ireland, given the current global marketplace for manufacturing, Puerto Rico remains an attractive option, particularly for U.S. multinational manufacturers.