You’ve seen the headlines about an IRS crackdown on tax dodgers in Puerto Rico — but you probably have also seen that residents of Puerto Rico don’t have to pay U.S. federal income tax. What’s going on?
Act 60
People living in Puerto Rico and earning wages on the Island don’t have to pay federal income taxes on that income. In fact, most residents of Puerto Rico don’t even have to file federal income tax forms, though right now there are advantages to doing so, since the Child Tax Credit is currently available for families in Puerto Rico.
This is not what has the IRS agitated. The issue is with Act 60, a set of special tax incentives for people and businesses willing to move to Puerto Rico. In order to encourage wealthy transplants to the Island, Puerto Rico gives these people a chance to avoid not only federal income tax on money earned in Puerto Rico, but also capital gains tax, property tax, and taxes on dividends, profits, and more.
Act 60 participants can pay 0% to 4% on most funds. In order to get this deal, they must live in Puerto Rico for 183 days, have no closer ties to a state than to Puerto Rico, buy property on the the Island, and donate $10,000 a year to a local charity. If they earn $3 million or more per year, they must hire at least one local worker. The details depend on whether a corporation or a person is involved, how much income they make, what kind of work they do, and an assortment of factors, but this is the basic outline of the rule.
The object of Act 60 is to encourage investment in Puerto Rico. As Invest Puerto Rico puts it, “Act 60 compiles all current tax incentives laws into a single code to promote the environment, opportunities, and tools needed to create sustainable development on the Island.” Many of the other incentives in Act 60 apply to local businesses as well, but the spectacular tax savings part is only for new residents.
Unintended consequences
Act 60 is intended to bring funds to Puerto Rico. It’s supposed to create jobs and support infrastructure. The idea is that wealthy individuals will sincerely make their homes in Puerto Rico, spend money there, and build businesses that employ local people. However, it makes business sense to source profits in Puerto Rico and to spend money in states, where the tax deductions will be more useful.
Relocate claims that Act 20 (part of Act 60) has been very good for Puerto Rico. “Between 2015 and mid-2019, 1,680 Act 20 decrees were issued,” they say. “During this time period, Act 20 companies brought in an estimated $210 million in fiscal revenue to the Puerto Rican economy, and the total investment jumped from $500 million in 2015 to $1.2 billion in 2019. While Act 20 is generally targeted at enticing U.S. businesses to commence operations in Puerto Rico and export services abroad, local businesses that export their services have also taken advantage of the incentives, with 35% of all Act 20 decrees being held by local businesses, defined in ETI’s study as businesses “in which most of the capital is owned by Puerto Rican residents.”
Pasquines refer to a study that found that Act 60 created 15,000 jobs between 2015 and 2019. Since Act 60 was passed in 2019, we think they must have meant the previous laws, Acts 20 and 22, but neither they nor PRelocate give the source of their information.
I60 claims that “During the first 8 years, 16,552 were employed by Act 20 companies and salaries increased 5x. Between 2015 and 2020, total payroll by Act20 companies grew from $130M+ to over $650M+. Skilled employees hired by Act 20/Act 60 companies grew by 4.7X. Between 2015 and 2020, the total employment of highly skilled labor increased from 2073 jobs to 9749 jobs.” Again, no source for the data is given. These claims, and other similar ones we found, are inconsistent and we cannot find a reliable source. please share one in the comments if you know of one.
Alongside the benefits of Act 60, whatever they may be, there are some unintended consequences. The requirement to buy property is increasing the cost of real estate and pricing local people out of their neighborhoods. In many cases, the property is used for rental housing or AirBnB rather than as a home.
The IRS
This is where the IRS comes in. They have identified a list of wealthy individuals who do not actually live in Puerto Rico, but are instead just giving the appearance of having moved to Puerto Rico in order to avoid paying their fair share of taxes. People may rent or lease a place in Puerto Rico without moving their families to the Island or taking part in the life of the community.
In addition, the IRS says that some people are taking advantage of Act 60 when their income does not actually come from Puerto Rico at all. In order to doge taxes, they wash funds through a sham business on the Island. Since they’re not really conducting business in Puerto Rico, they don’t bring new funds into the community.
The IRS is auditing and, when appropriate, plans to prosecute the individuals they’ve identified as possible tax cheats. They are not trying to end Act 60, but just to enforce the details of the law.
There are, however, local movements to end or amend Act 60.
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