Puerto Ricans visit Congress after House Democrats ask GAO to investigate island's tax code

A popular surf town on Puerto Rico’s west coast has become a haven for millionaires and crypto traders, according to Democrats in Congress, some of whom met this week with concerned island residents in Washington.

That area of the island’s mountainous coast, which was of affected by Hurricane Maria in 2017, houses local Puerto Ricans who have spent their whole lives in small beach communities.

But many of the island’s locals say the island’s tax code is allowing millionaires and wealthy crypto traders to come in and price them out by allowing wealthy developers to purchase too many residential properties.

As a result, “tax breaks that give thousands of investors, traders and other kinds of wealthy people incentives to partly relocate to Puerto Rico,” according to NBC Latino’s Nicole Acevedo. “The benefits have become a source of heated debate and controversy on the island,” she writes.

According to the report, crypto billionaire Brock Pierce and YouTuber Logan Paul are among the presumed celebrity beneficiaries getting the tax breaks.

Puerto Rican locals have raised troubling questions about the island’s tax code, saying it creates a “predatory tax evasion” scenario, which makes it much harder for actual, long time Puerto Rican residents to get property.

Meanwhile, wealthy businesses and individuals from the U.S. mainland are able to swoop in and enjoy the benefits of “significant tax avoidance”

Some others however contend the tax code is find the way it is, and have said the economic impact of the code has helped generated revenue for the island.

Here’s a summary of what NBC Latino reported:

The Congressional outlook at the House Natural Resources Committee

Some Puerto Rican organizations that oppose to the tax code met with congressional representatives and staffers in Washington this week to discuss the tax code.

Their visit coincided with the U.S. Government Accountability Office’s (GAO) Tuesday confirmation that it was reviewing a request from members of Congress to review the island’s tax incentives law (Act 60).

Some have said Act 60 allows wealthy individuals from the U.S. mainland and some businesses to avoid significant taxes.

Four Democratic members of the House Natural Resources Committee – Reps. Alexandria Ocasio-Cortez, Nydia Velazquez, Rep. Raul Grijalva of Arizona and Richie Torres of New York sent a July 23 letter to GAO nearly two months ago, raising questions about the issue.

The House Natural Resources Committee oversees Puerto Rico affairs in Congress. Their inquiry

The Internal Revenue Service has reported it is currently investigating about 100 cases of individuals purportedly gaining from the island’s tax breaks as part of a strategy to avoid U.S. taxation.

The tax code is more than a decade old: here's what's happened since it was enacted

The Puerto Rican government initially created the tax incentives – Acts 20 and 22 – more than a decade ago in 2012 to incentivize wealthy investors to come to the island so that businesses and corporations would help generate wealth.

Puerto Rico officials hoped the new code would create more jobs and increase island revenue as the island struggled to recover from economic recession.

Both codes, 20 and 22 alongside with other tax incentives were consolidated in 2019 under Act 60. Some local organizations now question if the code has helped the island, however.

Businesses that keep an office in Puerto Rico receive a 4% fixed income tax rate under Act 20 for exporting services. 

Individual investors who did not live in Puerto Rico between 2006 and 2012 can get a tax break under Act 22 if they buy an island residency and live there at least half of the year.

They are also required to contribute $10,000 to a nonprofit approved by the Puerto Rican government.

The government then awards them with a 0% tax rate on capital gains such as profits from trading cryptocurrencies or selling estate stocks.

As newly minted Puerto Rican residents, they also avoid paying federal income taxes, since Puerto Ricans don’t have actual voting representation in Congress as a U.S. territory. Instead, the island has a member that observes, similar to Washington, D.C.

Still, all residents pay local income, payroll, property and municipal taxes.

Residents also have the highest sales tax of any jurisdiction in the United States (11.5%), and they pay more for food and supplies, all of which have to be imported to the island, similar to the goods and services economy in Hawaii.

How many tax exemption decrees have actually been granted?

Since Act 20 was enacted in 2012, the Puerto Rico Department of Economic Development has granted at least 3,198 tax exemption decrees, according to information compiled by the Puerto Rico Institute of Statistics.

In a strange twist of irony, 40% of such exemptions have been granted to local Puerto Rican businesses, according to Carlos Fontan, director of the incentives office at the Puerto Rico Department of Economic Development.

He says one third were approved for individuals who also benefitted from Act 22.

As a result, about 6,000 tax exemption decrees have been granted under Act 22 during the past decade and change, according to Fontan who also told NBC Latino News that these beneficiaries paid a total of $160 million in local income taxes and $10 million in municipal taxes.

Democrats and locals are concerned however that while the code was implemented to help raise island revenue, the code has not had its intended impact. An April 5, 2022 Puerto Rico tax expenditure report says that the island lost about $2.2 billion in tax revenues related to Act 22 since 2017. For Act 20, revenue losses are estimated at more than $1.5 billion during the same period.

But there is a silver lining. One year before that report was published, the Puerto Rico Department of Economic Development found that between 2012 and 2017, Acts 20 and 22 created an estimated 33,000 new jobs on the island with average salaries of $36,000 while the median household income is only $22,000, according to a 2021 study.

“This helped bump Puerto Rico’s employment rate by 3% and total production by 2%. Without the tax breaks, Puerto Rico’s economic activity index would have been 2.64 points lower,” according to the study.

While Fontan praised the increase, housing activist Marlyn Goyco-Garcia told NBC News it serves as very little comfort to the Puerto Rican families and communities who are being priced out of their neighborhoods as more high-net-worth individuals flock to the island and buy properties,” NBC Latino reported.

Puerto Rico’s future

While tens of thousands of higher paying jobs have been created, Fontan also said Act 22 has helped generate $1.3 billion in new island real estate investment.

But that may have had an adverse impact on Puerto Ricans already living on the island who want to upgrade their quality of life and buy a new home.

According to the Center for Investigative Journalism in Puerto Rico new outside real estate investments forced the island’s housing market to spike significantly between 2012 and 2021, making it more difficult for residents to find a home.

Goyco-Garcia, who has also helped raise awareness with the #NotYourTaxHaven activism campaign, told Democratic congressional staffers Tuesday that island’s the tax breaks also means continental mainland states may be losing tax revenue as well.

“If you're not paying taxes in Puerto Rico, you're not paying taxes in your state, then this means that your state is also losing taxes,” she explained.

While there's no official data, Puerto Rican residents and local press have documented multiple instances in which Act 22 investors have bought residential buildings to resell at higher prices, develop them or convert them into short-term vacation rentals, Goyco-Garcia said.

Residents in the towns of San Juan, Quebradillas, Aguadilla, Luquillo, Rincón and in the island-municipality of Vieques have requested Puerto Rican legislators repeal Act 22,” NBC Latino reported.

The Center for Investigative Journalism in Puerto Rico also reported that some former officials are now providing private services to help outsiders tap the benefits of Acts 20 and 22.

Possible investigations

NBC Latino reported that it received an email Tuesday from GAO spokesperson Chuck Young who confirmed the agency will take a look at the complaint “as soon as staff become available.” A determination could take GAO more than a year to produce a final report, he said.

The network also reported that the IRS is coordinating efforts with Puerto Rico's Department of Economic Development to investigate possible tax fraud.

“We all have the same goal of only providing tax benefits to whoever is complying," Fontan said. “We obviously want to move forward with elimination of these tax decrees,” she added.