Highlights Of The Government Of Puerto Rico Proposed Fiscal Plan Presented To The Financial Oversight And Management Board Or Puerto Rico

On February 28, 2017, the Government of Puerto Rico presented to the Financial Oversight and Management Board or Puerto Rico (“Oversight Board”) a proposed Fiscal Plan for Puerto Rico (the “Proposed Plan”). The Proposed Plan indicates that it seeks to achieve fiscal solvency and long term economic growth.

To achieve its objectives, the Proposed Plan recommends fiscal reform measures, strategic reform initiatives and financial control reforms. These recommendations include:

i. Fiscal Reform Measures that reduce the 10-year financing gap by $33.3 billion, by:

• Revenue enhancements through tax reform and compliance enhancement strategies
• Government right-sizing and subsidy reductions
• Efficient delivery of healthcare services
• Pension reform

ii. Structural Reform Initiatives that provide the tools to significantly increase Puerto
Rico’s capacity to grow its economy, including:

• Improving ease of business activity
• Capital efficiency
• Energy Reform

iii. Financial Control Reforms through improvement of transparency, controls and
accountability of budgeting, procurement and disbursement processes.

Included herein are some highlights of certain initiatives that the Government of Puerto Rico is
recommending under the Proposed Plan.

A. Transformation of Hacienda

As part of the mentioned plan the Puerto Rico Department of the Treasury (“Hacienda”) will embark in a multi-year transformation process to reduce leakage of funds and improve revenue collections. Some of the specific initiatives that the Proposed Plan mentions are:

• Deploy internet Sales and Use Tax (“SUT”) collections through economic and affiliate
  nexus instead of consumer self-reporting;
• Implement point of sale (POS) SUT collections; and
• Substitute the excise tax under Act 154 (which was recently extended for 10 years)
  consistent with the requirements of Section 901 of the US Internal Revenue Code (“US
  Code”) and in harmony with the proposed US changes under the US Code for US
  multinationals operating in PR like:
  • Modified version of effectively connected income source rule;
  • Increase income tax rate on exempted income;
  • Income tax withholding on imputed royalty or cost allocation payments; and/or
  • Withholding income tax on profits distributions.

B. Changes to Service Charges

Also, the Proposed Plan suggest to revise fees and charges for services to keep up with market trends.
To accomplish this, the plan specifically endorses the:

• Increase motor vehicle license fees by 10%;
• Increase motor vehicle insurance fees by 5% (AACA);
• Increase traffic fines fees by 10%; and
• Increase other miscellaneous permits, charges and royalties by 10%

C. Subsidy Reduction

More so, the mentioned plan seeks to reduce subsidies to the University of Puerto Rico, municipalities
and others. According to the Proposes Plan, engaging in this initiative will result in savings of $6.5B
in 10 years. Specifically, the plan advises to:

• Reduce $350MM of municipalities’ General Fund appropriation while providing
  municipalities with a modernized property tax regime in order to close their budget
  gap by raising the effective tax rate to .65% and the nominal rate to 2%. Real Property
  taxes will be assessed based on market values that will be updated regularly and
  with every sale.
• Reduce $100MM in other subsidy programs by consolidating all incentives that
  provide special tax rates, deductions, credits, grants and other forms of economic
  incentives into a simple code.
• Reduce $300MM of University of PR’ General Fund appropriation.

D. Structural Reform

The Proposed Plan also procures to implement a variety of structural reforms that will provide a
cumulative 2.0% increase in GNP growth. These reforms include the improvement of ease of business
activities and energy reform.

– Improve Ease of Business Activity

1. Private Sector Labor Reform (Act 4-2017)
2. Permitting Process reform
3. Tax Reform
   • Lower marginal tax rates and broaden the tax base; simplify and optimize
     the existing tax code to achieve gains in efficiency, ease of doing business
     and reducing tax evasion

– Energy Reform

• Leverage and facilitate expedited private sector investments in modern, costefficient,
  and environmentally compliant energy infrastructure; reform PREPA
  operations and services to clients; and allow for greater competition in energy
  generation.

E. Economic Development Initiatives

Finally, the Proposed Plan seeks to implement a complete package of economic development
initiatives that will drive the marketing and attraction of new investments and the creation of new jobs
in Puerto Rico. Specifically, the plan seeks to target:

• Innovative Startups, by Provide a tax credit for innovative startups that receive
  Federal research and development grants (NIH, NSF, etc.) and perform that
  research in Puerto Rico; and
• Electronic Export Information, through working with the US Department of
  Commerce to eliminate the requirement to file an Electronic Export Information
  (EEI) for interstate commerce between Puerto Rico and the mainland US.

F. Pending Approval

The Proposed Plan needs the approval of the Oversight Board. The Oversight Board can make
comments or suggest modifications on it or could discard it and approved their own Fiscal Plan.

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If you have any questions or comments regarding the aforementioned, please do not hesitate to contact any of the following attorneys from our Corporate & Tax Practice Group at your convenience:

Luis L. Torres-Marrero	(787) 523-3438	ltorres@cstlawpr.com
Miguel A. Santiago-Rivera	(787) 523-3436	msantiago@cstlawpr.com
Diana M. Alcaraz-Irizarry	(787) 523-3435	dalcaraz@cstlawpr.com
Janice Seda-Irizarry	(787) 523-3434	jseda@cstlawpr.com
Alberto J. E. Añeses-Negrón	(787) 523-3466	aaneses@cstlawpr.com

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