Esta ley enmienda la "Ley de Incentivos Contributivos de 1998" para otorgar al Secretario de Hacienda la facultad de eximir a negocios exentos del cumplimiento de ciertas condiciones para calificar para un crédito parcial por impuestos retenidos sobre regalías y derechos de licencia relacionados con productos de alta tecnología. También permite la transferencia de dichos créditos a años contributivos subsiguientes y faculta al Secretario a reducir el impuesto sobre regalías, ingresos y derechos de licencia.
(Approved December 24, 2002)
To amend paragraph (2) and paragraph (5) of subsection
(c) of Section 5; and to amend subsection
(k) of Section 6 of Act No. 135 of December 2, 1997, as amended, known as the "Tax Incentives Act of 1998," in order to empower the Secretary of the Treasury to release exempted business from complying with any of the conditions imposed to qualify partial credit for taxes withheld on royalties and license fees to regard with high technology products, to allow the transfer of said credits to subsequent taxable years and to empower the Secretary of the Treasury to reduce the tax on royalties, revenues and license fees imposed in said Act.
The "Tax Incentives Act of 1998" as amended, (the Act), was created as an instrument to achieve the economic development of Puerto Rico through the creation of greater employment opportunities for the residents of Puerto Rico. In general, it intended to reduce the cost of doing business in Puerto Rico, reduce bureaucracy and the complexity of the incentives program, stimulate the growth of local capital, promote the development of strategic industries and advance the development of small and medium size business.
Through the years, the laws that have promoted the economic development of Puerto Rico have provided the necessary flexibility to the government agencies concerned to conduct negotiations with the manufacturers who explore the possibility of engaging in an industry or
business on the Island. The purpose of said negotiations is to achieve a balance between the needs of the manufacturers, and the economic and social benefit of the Commonwealth of Puerto Rico. However, these negotiations generally begin in the Industrial Development Company, and it is then, that the Secretary of the Treasury is consulted as to the effect of the proposed transaction on the public treasury.
Act No. 143 of August 6, 2000, amended the "Tax Incentives Act." Through said amendment a tax credit was granted to exempted business that produce certain high technology articles whose useful life is less than seven years, and that are marketed after January 1, 2000 and also pay more than one hundred million dollars annually for taxes withheld at source in excess of one hundred million $(100,000,000)$ dollars, and are claimed against the fixed income tax rate.
The purpose of the amendment introduced by Act No. 143, supra, was to stimulate enterprises that produce high technology articles to increase their production, and thus, the number of jobs. In this way, said enterprises would obtain greater benefits which, in turn, would increase the collections of the Department of the Treasury.
Experience has shown that the conditions imposed on exempted business to be entitled to the credit, instead of meeting the purposes of the Act, to a certain extent manner restrict its effectiveness. Therefore, we deem it is pertinent to grant a certain degree of flexibility in the compliance of said conditions.
Tax credits directly affect the receipts of the General Fund. The Secretary of the Treasury is the person who has the responsibility of collecting the funds that nourish the public treasury and has full knowledge of the fiscal situation of the Island. Therefore, he/she is the most suitable
person to exempt, evaluate, determine and, if necessary, negotiate the conditions that should be met by an exempted business to avail itself of the credit or to carry over the existing credit to subsequent years. This must always keep in mind the economic and social welfare of the Commonwealth of Puerto Rico.
On the other hand, the Secretary of the Treasury has the flexibility, by law, to negotiate the fixed tax rate applicable to income, but he/she does not have that same flexibility to negotiate other applicable tax rates, such as the tax rate on royalties, revenues and license fees. Given the volume of business of some of the enterprises that have availed themselves of the Act, the amount of said tax could mean the difference between establishing or continuing to operate on the Island, or establishing or transferring their operations to another jurisdiction.
Therefore, we deem it is necessary for the Secretary of the Treasury to have the flexibility to negotiate the present ten (10) percent tax rate on royalties, revenues, or license fees, taking into account the fiscal health and welfare of the Commonwealth of Puerto Rico.
The Commonwealth of Puerto Rico must maintain its economic competitiveness at the world level. The flexibility to negotiate conferred to the Secretary of the Treasury through this measure helps us to achieve this purpose.
Section 1.- Paragraph (2) and paragraph (5) of subsection
(c) of Section 5 of Act No. 135 of December 2, 1997, as amended, are hereby amended to read as follows: "Section 5.- Credits.-
(a) ...
(b) ...
(c) Partial Credit in Payment of Royalties, Revenues, and License Fess. (1) ... (2) The exempted business that qualify for the credit provided in this subsection
(c) , are those that:
(i) ... (ii) ... (iii) ...
The exempted business may request the Secretary of the Treasury to release it from compliance with any of the preceding conditions. The request shall include the reasons for which the exempted business requests said release. Once the Secretary of the Treasury analyzes the specific facts, circumstances and arguments of the case, he/she may grant the release or it condition, provided that said release will benefit the best economic and social interests of Puerto Rico. (3) ... (4) ... (5) The credit that is provided in this subsection
(c) shall be annually limited to the tax to be paid with regard to the fixed rate on industrial development income generated by high technology products, as identified in the tax exemption decree. Any excess over the maximum allowed shall not be carried over to subsequent taxable years unless the Secretary of the Treasury authorizes said carry over.
(6) ..." Section 2.- Subsection
(k) of Section 6 of Act No. 135 of December 2, 1997, as amended, is hereby amended to read as follows: "Section 6.- Exemptions.-
(a) ... ...
(k) Royalties and License Fees. Notwithstanding the provisions of law, in the case of payments made by exempted businesses that hold a decree granted under this Act to corporations, partnerships or nonresident persons for the use or privilege to use licenses, intellectual property, formulas, technical knowledge, and other similar property, in Puerto Rico, they shall be levied and collected and said payments shall be subject to a ten (10) percent tax, in lieu of another tax, if any, imposed by law. The Secretary of the Treasury may recommend the imposition of a tax of less than ten (10) percent, but never less than two (2) percent, provided he/she determines that said reduced tax would results in benefit of the best economic and social interests of Puerto Rico in consideration of the special nature of the specific exempted business, or of any other benefit or factor that in his/her judgment, merits said determination. The exempted business that makes said payment shall deduct and withhold said tax, and shall inform and remit it to the Secretary of the Treasury pursuant to the provisions of the "Puerto Rico Internal Revenue Code." (1) ..."
Section 3.- Effectiveness.- This Act shall take effect immediately after its approval, with the exception of the provisions of paragraph (2) and paragraph (5) of subsection
(c) of Section 5, which shall be applicable as of August 6, 2000.
I hereby certify to the Secretary of State that the following Act No. 289 (H.B. 3169) of the $4^{ ext {th }}$ Session of the $14^{ ext {th }}$ Legislature of Puerto Rico:
AN ACT to amend paragraph (2) and paragraph (5) of clause
(c) of Section 5; and to amend clause
(k) of Section 6 of Act No. 135 of December 2, 1997, as amended, known as the "Tax Incentives Act of 1998," in order to empower the Secretary of the Treasury to release exempted business from compliance with any of the conditions imposed to qualify partial credit for taxes withheld for royalties and license rights regarding high technology products, to allow the carrying over of said credits to subsequent taxable years and to empower the Secretary of the Treasury to reduce the tax on royalties and license rights imposed in said Act, has been translated from Spanish to English and that the English version is correct.
In San Juan, Puerto Rico, today $20^{ ext {th }}$ of August of 2004.
Elba Rosa Rodríguez-Fuentes Director
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