One could argue that the new face of American leadership can be found in Puerto Rico. Take, for example, newly elected Governor Alejandro Garcἰa Padilla. He won a narrow election in what could someday be America’s 51st state, on an island with 3.7 million people. Perhaps most importantly, the new administration seems to be continuing the business- and investment-friendly policies of previous governor Luis Fortuño. Indeed, it appears that on either side of the political spectrum, Puerto Rico is committed to becoming a tax-friendly investment haven. The rest of the continent would do well to take a look.
Following in Fortuño’s footsteps, Padilla seeks to expand an economy roughly the size of Delaware. As the new governor articulated in his message platform, his plan will “attract industries that cannot operate outside the United States because of security and tax reasons.”
From the mainland, looking out toward the Caribbean, Puerto Rico’s strategic path towards a U.S.-based tax haven makes a lot of sense. In recent years, it has become harder and harder to repatriate income into the United States, with an estimated $8 trillion settling offshore. Certain industries, such as those investment funds regulated within U.S. securities law, still might prefer to do business within an American-based jurisdiction. Then, there’s the issue of real tax advantages, such as simplification and lower effective rates. Where else within U.S. territorial waters can the U.S. stop the filing of a federal income tax return, other than Puerto Rico? Recently, the Internal Revenue Service issued this advice in Topic 901; as of January 4th, 2013:
“In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income from sources outside of Puerto Rico or if they are employees of the U.S. government.”
How can someone potentially prove that all of his or her income is sourced within Puerto Rico? Well, a first step is moving yourself and your assets there. Sources, such as Bloomberg, are now reporting that at least ten wealthy investors have already made the jump. Then, for some, there is utilizing the new law that was set up to lure businesses into Puerto Rico – known as Act 22, it exempts those who qualify from income tax on their interest, dividends, and certain long-term gains from securities. There’s no need for a Phil Mickelson apology tour like hedge fund billionaire John Paulson has attempted. Puerto Rico incentives will matter to those who meet their attractive conditions.
On the international front, legal advisers explaining Act 22 advise foreign investors that as long as they do not own residential holdings within the United States (excluding Puerto Rico), they may not be subject to U.S. estate taxes. This tax code structure could provide Puerto Rico with the best of both worlds on how money walks onto the island – foreign assets if you want it offshore, and domestic governance if you need it onshore.
Since states like Florida (without a personal income tax) have attracted $86 billion in adjusted gross income due in part to tax factors (1995-2010), Puerto Rico’s competitive climate could show other states how tax code incentives work with financial services. Governors like Louisiana’s Bobby Jindal are pressing to repeal state personal income taxes altogether for the same goal: Más dinero para tu bolsillo (more money in your pocket). Within the next decade, if these state initiatives do not pass… Puerto Rico could have more money in its tax-haven pocket as a result.