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Congress of the United States ‘Biashington, WE 20515 December 19, 2019 “The Honorable Steven T. Mauchin ‘Secretary ofthe Treasury 1500 Pennsylvania Avenue, NW ‘Washington, D.C. 20220 ‘Dear Secretary Mnuchin: ‘We write to request thatthe Department of the Treasury conduct greater oversight over a varity of tax breaks provided to individuals and businesses in Puerto Rico and their impact on Federal tax revenues. In particular, Acts 20 and 22 of Puerto Rico have led to significant tax avoidance by wealthy individuals ‘residing’ on the island, While some have tried to promote these tex breaks as economic development tools, we believe that these giveaway’ have not resulted in any ‘benefit for Puerto Rico. ‘As you know, the Federal tx history of Puerto Rico is extremely complicated for both businesses and individuals. Since 1954, Federal income taxes have not been extended to income teamed in Puerto Rico, as specified in IRC § 933. Rather, the tax goal has been to allow the territorial government to tx the revenue sources directly at levels necessary to overcome the lack of equal treatment in Federal finding programs. However, es Puerto Rico's fiscal status has declined, its recent tax policies appear to undermine the federal goals of IRC § 933, In 2012, the territorial government enacted two laws, Acts 20 ‘and 22— potentially in viotion of the uniformity clause of the Constitution of Puerto Rico!— ‘withthe goal of luring wealthy individuals and businesses providing services in the States to Puerto Rico, These laws exempt these individuals from almost all local taxation if they ‘reside’ ‘onthe island fora majority ofthe year. Under the laws, numerous tax exemptions and rate reductions are granted unt 2035, with litle economic justification. The beneficiaries are not ‘equired to make signficast specific economic contributions tothe territory, or even any contributions that justify any tax savings at all “The result is that the combination of Federal and territorial laws has enabled high-income individuals and profitable service businesses to avoid any Federal or territorial taxation on some ‘income and to owe extremely low rates of tax on other income. By ‘residing’ on the island for 183 days per year, these irdividuals now avoid both Federal and local taxes. This results in tax ‘benefits that individuals end businesses could not obtain anywhere else in the world, In other words, Puerto Rico has become a tax haven from the Federal government. For example, under Act 2, individuals do not have to pay any tax to any government on gains {rom buying and selling stocks and bonds in the States. Under Act 22, individuals and their firms that provide services inthe States from the territory pay an income tax rate of four percent, PR Cone a. Vi, 83. ‘The teriterial tax exemptions granted to those wishing to avoid Federal taxes stands instar, ‘unfavorable contrast with the treatment of long-time Puerto Ricans and most other individual and ‘corporate residents ofthe teritory. Most individuals and locally-owned corporations pay high rates of local tax. “There are many other concerns associated with Acts 20 and 22. The better treatment of Act 20, and 22 beneficiaries isnot limited to taxes: they have also been exempted from territorial ‘inheritance laws, which may have implications for Federal estate taxation. Tere reportedly are ‘more than 1,600 individuals and firs who have relocated frm the States to Puerto Rico in ‘order to avoid Federal, State, and local taxes2 A few years ago, a esta oficial said thatthe ‘smaller number of individuals then included two billionaires and that the average net worth of ‘Act 20 and 22 beneficiaries was $7 millon. We understand that the IRS is aware of eases in “which busnesses in the States route their services trough ‘front’ fis in Puerto Ric that do no real work, We have also heard ofa ease in which an individu! avoids S60 million a yearn ‘Federal taxes trough these tenitorial polices. There are aso questions sto whether Act 22 “beneficiaries ae eally present in Puerto Rico 183 days a year as required by IRC § 937. “The combination ofthe Federal and tervitorial tax exemptions isnot only depriving the territorial governmest of revenue intended by IRC § 933, but it also appears todo so without any showing of economic benefits. Additionally, Acts 20 and 22 deprive the Federal, State and local governments of needed revenue. In order to better understand the impact ofthese policies, we respectfully request that the Department: 1) Evaluate whether the Sec. 933 benefit should apply to individuals and firms that relocate ‘fom the States and obiain Acts 20 and 22 benefits, 2) Examine the enforcement of Sec. 937 by the IRS and teritorial officials; 3) Determine whether Sec. 933 is accomplishing its purpose, specifically inthe case of these avoiders of taxes in the States, or whether it should be amended; 4) Calculate the revenue costs tothe teritorial government, as well as to the Federal, State, ‘and local governments; 5) Investigate how the Sec. 937 183 days a year presence in the territory requirement is ‘being enforced by the IRS and the territorial government and the effectiveness of their ‘monitoring; 6) Atalyze whether Sec. 937 should be amended to enhance its effectiveness; whether the ‘ertoral inheritance law exemption for Act 22 beneficiaries is adversely affecting Federal estate and generation-skipping taxation and whether U.S. law should be sarended; and 1) Consider whether the territory's tax exemptions comply with the requirement in its constitution that taxes be uniform, 2 See Peformance of Icetive Progra Act 20-2012 and Act 222012, PR Departent of Economic Developnest and Comme, hg: deep govwp-coten/uplods2019/1 Performance of Incentives, Repo ‘Ret 20-and, Act 2 pt. “Thank you for your cooperation and we look forward to working with you on ths important matter. Clee Migs. Mla, D ne Serato c Nyda M. Vezquee fase ian yee Zab Bt, (FOC ‘Member of Congress ‘Member of Congress