Author: DANIKA KOTO
SAN JUAN, Puerto Rico (AP) — Puerto Rico's tax incentives, which have lured thousands of wealthy Americans to the U.S. territory for more than a decade, are under scrutiny after federal lawmakers released a Government Accountability Office (GAO) report Friday.
The report found that the island's benefits could amount to hundreds of millions of dollars a year and called on the Internal Revenue Service (IRS) to improve oversight, warning that some recipients “may not meet their federal tax obligations.”
The report was requested in July 2023 by Democrats on the House Natural Resources Committee to investigate how the tax breaks “could create an unfair tax haven for the super-rich and provide no benefit to the people of Puerto Rico.”
Rep. Jared Huffman, D-Calif., said in a statement Friday that after President Donald Trump's administration slashed the size of the IRS, “there is almost no one left to review whether this transfer of wealth even meets the basic rules and residency requirements to justify these tax breaks, let alone contribute to society.”
IRS under scrutiny
The report is based on the results of a review that began in December 2023 and ended this month. He noted that between 2012 and 2024, Puerto Rico provided more than 5,800 incentive decrees for resident investors and nearly 3,900 decrees for export service businesses.
The majority of resident investors come from California, followed by Florida, New York and Texas.
In 2021, the IRS announced it was investigating concerns that some people may be avoiding their federal tax obligations.
This “campaign has only recently begun to produce results, in part due to the complexity of high-income and high-asset audits, the IRS' lack of priority in efforts, and gaps in communication between the IRS and Puerto Rico,” the GAO report states.
He also noted that until this year, the IRS was unable to obtain complete data on those claiming the investor stimulus with Social Security numbers to ensure compliance. The IRS also did not plan to receive updated data from Puerto Rico and did not pursue U.S. taxpayers who Puerto Rico determined did not meet the territory's residency requirements.
The report cited an example from August 2023, noting that Puerto Rican officials shared the results of an audit that identified 179 taxpayers who did not provide evidence of meeting the residency requirement.
“The (IRS) staff reviewed some of the cases before concluding that the referrals should not be prioritized,” the GAO said.
Federal lawmaker Alexandria Ocasio-Cortez criticized the exemptions, saying “the policy not only increases wealth inequality on the island, but also steals valuable federal tax revenue used to fund Social Security, Medicare and other important federal programs from the pockets of Americans.”
GAO noted that in 2024, Democratic staffers on the Senate Finance Committee began an independent investigation into oversight of the waivers.
The IRS said it agrees with the GAO's recommendations and has taken steps, including discussions with Puerto Rico Treasury officials, to agree to the annual data request.
13 years of incentives
The incentives, created by former Gov. Luis Fortuño in 2012 to boost the local economy, apply only to those coming from outside Puerto Rico and meeting certain requirements.
The benefits have long been criticized on the island of 3.2 million, which has a poverty rate of more than 40%, and some local officials have said they have, among other things, contributed to rising housing costs.
The Export Services Act, commonly known as Act 20, offers incentives including a 4% corporate tax rate and a 100% exemption on dividends or profit distributions.
Meanwhile, the individual investor law, known as Act 22, targets wealthy individuals moving to Puerto Rico and offers a 100% exemption on dividends, interest and long-term capital gains.
A study commissioned by Puerto Rico's Department of Economic Development and Trade and published in 2019 found that the incentives created more than 36,200 jobs and attracted more than $2.5 billion in investment.
The agency estimated in a 2024 study that by 2022, people receiving the benefits had opened more than 1,000 businesses and paid more than $200 million in taxes and contributions to Puerto Rico, while the benefits cost the government $184 million. The study also found that companies providing export services directly employ about 22,000 people.
The Puerto Rico Treasury Department estimates that from 2020 to 2026 the government will lose $4.4 billion from incentives for individual investors and $1.8 billion from incentives for export services businesses.
Meanwhile, the GAO said that “Puerto Rico's economy has shown little or no growth” since the stimulus was introduced in 2012, but added that it is “impossible to measure how much growth or contraction would have occurred without the stimulus.”
He also noted that two major hurricanes, a series of earthquakes and the pandemic have impacted economic performance.
Puerto Rico has since tightened compliance and reporting requirements for wealthy outsiders to address concerns and help boost the economy, including doubling the required annual individual donation for nonprofits to $10,000.
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This story was translated from English by an AP editor using a generative artificial intelligence tool.
