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Institutional Investor

Interview with William Riefkohl: Executive Director, Puerto Rico Industrial Development Company (PRIDCO)

March 1, 2002
Copyright © 2002
Gale Group Inc. All Rights Reserved.

Q: Section 936 of the U.S. Internal Revenue Code, exempting local manufacturers from federal taxes, and the wage credit provisions under Section 30A will both end in 2005. How is this affecting Puerto Rico's economy?

The economy of Puerto Rico is undergoing a major transformation. From labor-intensive, low-wage jobs, industry is being transformed into high-technology, high value-added operations. These technology-driven industries resist most external changes and continue to grow even during hard times. The new technology operations tend to move to lower-cost areas.

Q: Weren't these industries passe for Puerto Rico with or without the tax benefit?

Exactly. In the midst of this job loss, industry clusters such as pharmaceuticals, medical devices, personal health care, electronics and instruments have grown. With the impending demise of Sections 936 and 30A, many companies were shifting status to become controlled foreign corporations, or CFCs, to defer paying tax until they repatriate income. Over 80 companies have become CFCs so far, and the rest will probably switch by the end of 2005.

Q: Would the proposed Section 956 replace 936 and 30A?

We need to make a distinction between being a CFC in the Pacific Rim, for example, and being a CFC in Puerto Rico and U.S. territories. The proposal is that if CFCs based in Puerto Rico or U.S. territories reinvest profits, the additional income generated in this way could be lent or invested in U.S. companies and taxed at a 10 percent rate. Or if the CFCs distributed dividends, they would pay 15 percent instead of the prevailing 35 percent. It is a win-win situation because we could attract investment and create jobs, while the U.S. would get earnings and collect tax revenue it cannot get under the current structure.

Public and private sectors in Puerto Rico have endorsed 956, and when it was presented to the U.S. House of Representatives it had the support of 35 congressmen, compared to only four who supported section 30A when it was proposed.

Q: Can PRIDCO ensure Puerto Rico's competitiveness, with or without 956?

It has been Puerto Rico's tradition to attract companies by giving generous incentives to locate here, provide infrastructure and training, and then go out and convince other companies to do the same. That is no longer enough. We have to make connections and develop industrial clusters. Some industries are heavily represented in Puerto Rico, but they do not represent clusters, they are the raw material.

Puerto Rico does have critical mass in the clusters that I mentioned before. The sectors we would like to grow are optics, plastics, communications and IT, and biotechnology.

We want to work with core manufacturers from the private sector, and provide all of their supply chain needs: design and development, parts supply, warehouse and distribution systems, even new academic degrees to meet their specific requirements. We also must meet the needs of their employees in terms of housing, entertainment, amenities and cultural aspects. We will build more multi-factory buildings with facilities for small companies and start-ups, and modular systems to permit expansion. We want to reduce the costs of operating in Puerto Rico, and speed up the permit process. When 956 comes through, we will benefit from all of this.

Q: What about stimulating local industry?

Puerto Rico companies represent only 20 percent of total industry on the Island, and this has not changed for 40 years, primarily because they produce mostly for the local market. We now offer a credit against local taxes for non-tax-exempt companies with operations in Puerto Rico, to buy local products for distribution not only on the Island but also on the mainland. Interest has been overwhelming, and the primary challenge will be for local industry to respond to increased demand. We are thus helping local industries become global players.

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