Puerto Rico Slaps Tax on Products by Companies Headquartered Elsewhere

Published December 12, 2010

A new tax law in Puerto Rico could jeopardize business investment on the island, including investments by the island’s important biopharmaceutical industry, says John Castellani, president of the Pharmaceutical Research and Manufacturers of America.

Law 154 amends the Puerto Rico Internal Revenue Code to impose a six-year excise tax on products manufactured on the island by companies headquartered elsewhere. This tax would be phased in over six years: 4 percent in year one; 3.75 percent in year two; 2.75 percent, year three; 2.5 percent, year four; 2.25 percent, year five; and 1 percent in year six. It affects manufacturers with $75 million or more in gross receipts from products being exported from the island.

No Discussion or Review
“One of the challenges for our members was that the bill was introduced on a Friday afternoon and signed into law on the following Monday. There was no discussion or review,” says Castellani.

The law took effect January 1, 2011, giving companies just 60 days to prepare for it, notes says Kendra A. Martello, assistant general counsel for the Pharmaceutical Research and Manufacturers of America.

U.S. drug companies invested a record $65.3 billion in research and development of new medicines in Puerto Rico last year, providing nearly 100,000 jobs.

Hundreds of Drug Studies
Puerto Rico plays an important role in the clinical study of innovative new medicines. In 2008, U.S. scientists and researchers conducted 21,795 studies to develop medicines targeting cancers, rare diseases, and other important conditions; 425 of these trials were active in Puerto Rico.

“This law will adversely affect our members because it creates too much economic uncertainty. I think in the future, businesses will have to examine on a case-by-case basis whether or not they will continue making investments in Puerto Rico,” said Martello.

On Oct. 26, one day after Law 154 was passed, the U.S. Chamber of Commerce wrote its counterpart in Puerto Rico: “[I]mposing an arbitrary new tax sends a bad signal to business. In all likelihood, the new tax will curb foreign investment, hinder job creation, and hurt the competitiveness of Puerto Rico. By imposing a discriminatory new tax, without notice or the benefit of public hearings, a negative message is sent to new and existing investment in Puerto Rico. A strong incentive is created for foreign companies to look elsewhere for their manufacturing and distribution.”

Kenneth Artz ([email protected]) writes from Dallas, Texas.