Academic journal article Journal of Business and Accounting

Puerto Rico's Corporate Amt Is Declared Unconstitutional as It Violates the Dormant Commerce Clause

Academic journal article Journal of Business and Accounting

Puerto Rico's Corporate Amt Is Declared Unconstitutional as It Violates the Dormant Commerce Clause

Article excerpt


While current headlines warn of the mounting U.S. debt and the debt obligations of many states and localities, and past headlines have highlighted financial crises and burgeoning debt in places such as Detroit, Illinois, New York, and Greece, a financial crisis has been brewing in the Commonwealth of Puerto Rico (the Commonwealth or Puerto Rico) for nearly a decade, which has recently come to a head and been the focus of the U.S. government, creditors, and the financial markets. Puerto Rico has been a U.S. possession since 1898, when it was ceded to the U.S. after the Spanish-American War. Since the passage of the JonesShafroth Act in 1917 by Congress, it has had favorable special tax status. Puerto Rico's bonds have a tax advantage over the bonds of most U.S. states and municipalities, as they are exempt from most federal, state, and local taxes. This enabled Puerto Rico to turn to the credit markets to pay for operating expenses and make up for annual budget deficits. In fact, since 2000, Puerto Rico had $126.6 billion in bond sales; about 17 different entities of Puerto Rico have issued debt to be repaid with various legal guarantees and revenue streams.

All this has led to Puerto Rico being insolvent and unable to pay its debts as they come due. It owes $72 billion in public debt to investors and approximately $46 billion in unfunded government pension funds. Its debt exceeds 100% of its gross domestic national product. In fact, it has more public debt than any U.S. state government other than California and New York. On May 1, 2016, it defaulted on $370 million in bond payments, and on July 1, 2016, it defaulted on over $800 million in debt payments. With a population of approximately 3.5 million people and a steady exodus of residents leaving for the U.S., coupled with an economy in shambles, the prospects for Puerto Rico to have the ability to satisfy its debt obligations in the future are dismal.

Even though the Puerto Rico Treasury Department (Treasury) doubts the Commonwealth's ability to persist as a going concern, Puerto Rico may not file for bankruptcy. Under U.S. federal law, states may authorize their municipalities, including public utilities, to file for bankruptcy; however, generally it does not allow Puerto Rico to do so, as held in Puerto Rico v. Franklin California Tax-Free Trust, 136 S. Ct. 1938 (2016).

Congress passed the "Puerto Rico Oversight, Management, and Economic Stability Act," or PROMESA, Pub. L. No. 114-187, 130 Stat. 549 (2016), as a means of providing relief for Puerto Rico while protecting the interests of the creditors by establishing the Financial Oversight and Management Board (the Board) and a process for Puerto Rico to restructure its debt. PROMESA 201 provides that the Board must approve a Fiscal Plan that "provide[s] a method to achieve fiscal responsibility and access to the capital markets." Also, PROMESA provides that the Fiscal Plan must respect the "relative lawful priorities" of Puerto Rico in effect prior to the enactment of PROMESA.

In May of 2015, Puerto Rico amended its corporate alternative minimum tax (AMT) as a means to raise revenues for the purpose of satisfying its constitutional mandate that its budget must be balanced. The legislature needed to raise $125 million quickly. Thus, it proposed new graduated rates for the AMT's tangible-property tax, with a new top rate of 6.5%, representing a 325% increase over the prior flat 2% rate. The amended AMT was purposely designed to generate tax revenues from Wal-Mart, Puerto Rico, Inc. (Wal-Mart PR). The amendments also eliminated a provision in the AMT allowing the Treasury Secretary (Secretary) to exempt a tangible-property transfer from the tax when proof was provided that the transfer price equaled or was similar to the price paid in an arm'slength transaction between unrelated parties. The tangible-property tax applies only to multistate corporations and their local affiliates when they engage in an interstate transaction with an out-of-state home office or related entity. …

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