PhRMA Raises Concern about Tax on Offshore Manufacturers in Puerto Rico

Puerto Rico’s Governor Luis Fortuno unveiled a fiscal reform package in Puerto Rico this week as part of economic development and budget-deficit reduction plan for the commonwealth. The proposal calls for the reduction of individual and corporate tax rates, but a measure to impose a tax on offshore manufacturers in Puerto Rico has drawn criticism from the pharmaceutical industry.

The governor presented his plan on Oct. 25 to the Puerto Rican legislature, which is expected to approve the legislation by the end of its regular legislative session, according to an Oct. 26 press release by the Puerto Rico Federal Affairs Administration (PRFAA), a Washington D.C-based government body of Puerto Rico that functions as liaison to local, state, and federal bodies in the United States. The plan will provide tax relief for the current 2010 tax year, and starting Jan. 1, 2011, would reduce individual tax rates by 50% and 30% for businesses, providing an average of $1.2 billion in annual tax relief during the next six years, according to PRFAA.  The measures are part of an economic development and deficit-reduction plan. The commonwealth’s budget deficit was $3.3 billion when Fortuno took office in January 2009, according to PRFAA.

The Puerto Rico legislature, however, passed over the weekend a measure to implement a temporary tax on offshore manufacturing firms, a move that has drawn criticism from the pharmaceutical industry. According to a Reuters report, the tax would target between 40 and 50 firms operating in Puerto Rico that make more than $75 million annually. The measure is scheduled to take effect Jan. 1, 2011 and run through 2016 with a tax levy of 4% in 2011, 3.75% in 2012, and 2.75% in 2013, according to the Reuters report.  

Puerto Rico is a significant site for pharmaceutical manufacturing. The commonwealth currently has more than 50 bio/pharmaceutical manufacturing facilities, according to data from the Puerto Rico Industrial Development Company (PRIDCO), the economic development arm of the commonwealth of Puerto Rico. Manufacturing accounts for approximately 40% of Puerto Rico's gross domestic product of $93 billion, and life-science operations (pharmaceutical, biopharmaceuticals, and medical-device), represent 70% of the commonwealth's manufacturing activities, according to data from PRIDCO. Puerto Rico ranks itself on a global basis as the third largest biologics producer, the fifth largest pharmaceutical manufacturer, and the seventh largest producer of medical devices.

 “PhRMA member companies have long had a strong presence in Puerto Rico, providing thousands of stable, high-paying jobs, and investment in local economies in the search for new medicines,” said Pharmaceutical Research and Manufacturers of America (PhRMA) President John Castellani, in an Oct. 25, 2010 statement. “…Law 154 will dramatically hinder these companies’ positive efforts within Puerto Rico. The measure imposes special taxes on certain activities and transactions conducted by nonresident individuals and companies in Puerto Rico. This could significantly reduce the ability of PhRMA’s members to operate in the Commonwealth and to continue to make significant investments in researching and developing innovative new medicines for patients,” he said.

PhRMA also raised concerns that the legislation with the tax on offshore manufacturers was passed without adequate public input. “In addition, we are concerned that this significant new tax increase was developed and enacted without the opportunity for public input and comment,” said Castellani in his statement. “Transparent and predictable tax policies are critical to helping foster innovation in Puerto Rico. These policies should be developed and vetted through a public process involving all relevant stakeholders, including PhRMA member companies. PhRMA said that the biopharmaceutical research sector in Puerto Rico supports 94,217 jobs and $3.6 billion in output in Puerto Rico, according to 2006 data.

See related PharmTech stories:

Puerto Rico Builds a Foundation for Biopharmaceuticals (PharmTech)

Bio/Pharmaceutical Investment in Puerto Rico (podcast)