Puerto Rico Tax Partner on why PR is the best place for OZ Projects

Maria De Los Angeles Rivera

The Opportunity Zone Expo Podcast
Puerto Rico Tax Partner on why PR is the best place for OZ Projects


Jack: Welcome back everyone to the OZExpo podcast. My name is Jack Heald. I’m your host. Joining me today is Maria de Los Angeles Rivera. She's a tax partner and the International Business Center director at Kevane Grant Thornton, which is an accounting and advisory firm based in Puerto Rico. Welcome Maria.

Maria: Thank you Jack. And thank you for having me on your podcast.

Jack: It's really good to have you here. I've had a couple of very good conversations with some of your government officials, Gerard Portela, who's the Chief Investment Officer. And I'm drawing a blank on the other folks that I've talked to.

Maria: Manuel Laboy.

Jack: Manuel Laboy. That's right, Manuel Laboy. I met him in person. That was terrific. I loved talking to him.

You're in Puerto Rico, so let's ask the obvious question. How's the recovery going after those ridiculous storms you all suffered through in 2017?

Maria: Thank you for asking Jack. And again, thank you for having me on your podcast. As you know, and most of your audience knows, Puerto Rico, back in 2017, was hit very bad by two storms, Irma and Maria. And for me personally has been the worst I've seen of a storm and what comes after the storm.

But I'm really happy to tell you and tell your audience that Puerto Rico is back up on its feet, back up and open for business. Infrastructure is up and running. Some of the infrastructure like the power utility, it's going through a revamping process where a lot of new construction is going to be done. All these funds that are coming to Puerto Rico for the recovery and reconstruction.

And also, we are betting on private industry working together with the government in some P-3 type of projects to help bring that power utility back to 21st century status. But again, our Internet service is on, all our offices are working, phone and cell phones are up and I think it's better than before. We even have 5G technology already.

Jack: Hey, we don't have 5G.

Maria: Though we do have 5G technology in Puerto Rico. So that's part of the silver lining after the storms. Of course technology's better. I want to communicate that. Yeah, it was bad. We are still working on the reconstruction around recovery, but you know, we're are seeing a lot of good things for our future.

Jack: Well, thank you.

Let's find out a little bit about you before we dive into some of these more detailed questions. In my research I discovered that you attended the University of Texas at Austin.

Maria: Mm hmm. That’s correct.

Jack: What did you study at UT, the University Texas?

Maria: I went for my master in professional accounting with a major in taxation. I spent almost two years at UT Austin doing that master’s right after I finished my bachelor's in accounting here in Puerto Rico.

Jack: Did you enjoy your time there in Texas?

Maria: Oh, very much. I made lifetime friends and for a while I used to go back every summer.

Jack: I gave your title at Kevane Grant Thornton. Tell us a little bit more. What is it that you're responsible for getting done there at Kevane Grant Thornton?

Maria: Well, I'm in charge of our tax department here. We are close to 50 people in our department, one of the largest tax departments in Puerto Rico, including some of the big four firms. As an administrative partner, I'm in charge running the department. But I'm also working on the consulting group that we have in our tax department. And in that group, we work with everything except tax compliance mostly.

So, everything that needs to be done with dealings with the government agencies, applications for extension grants, which we'll be talking a little bit more later, solving issues for our clients, consulting regarding organizations coming to do business in Puerto Rico. What you need to know about coming to Puerto Rico, what extensions and advantages you have for coming to Puerto Rico.

And we do transfer pricing and estate tax planning. As tax department head it's kind of a big job.

Jack: My head hurts just listening to you describe and those are just the headlines.

Maria: Those are the headlines. Yeah. Not the details.

Jack: Oh, my Lord.

Maria: Here at Kevane for the last 22 years. Kevane is a local Puerto Rico firm. Next year will be our 45th anniversary. Don't let the name mislead you. The founding partner was Mr. Kevane, of course. He came from the States.

He came to work with the late firm of Arthur Andersen back in the day. And then when it was time to go back to the States, he says, “No, I'm gonna stay.” And they say “no,” but he said, “Yes, I'm going to stay.” And so that's how we were born.

And the Grant Thornton is because we are a part of the Grant Thornton international network of firms. This is a global firm. We are in 135 countries around the world, but each firm is an independent firm.

What we try to accomplish is provide our clients and especially our international clients, the same feeling of the services they get. Like for example, here in Puerto Rico, I contact them with someone in the U.S. or Spain or other country and they can be sure that they're going to receive the same type of treatment they get here from us. And that's part of also my role as international business center director, which is a specific position that we have in Grant Thornton.

I haven't heard of any other network in the world having some thing like that. And we are like ambassadors, international ambassadors for our clients.

Jack: This is one job you have?

Maria: Yes. Just one, well my day job.

Jack: You sound like a department unto yourself.

Maria: Well, try to accomplish a lot of things specially and mostly keeping in mind promoting Puerto Rico and letting people know about Puerto Rico.

Jack: Well, let's talk about Puerto Rico and taxes. Now the biggest attraction of the Opportunity Zone program is tax deferral, so taxation is always on our minds whenever we talk about the Opportunity Zone,

Maria: We say, “tax is sexy.”

Jack: You go ahead and say that.

Maria: “Tax is sexy.”

Jack: Yeah, yeah. I'll take your word for it.

Maria: Okay.

Jack: I'm not going to fight with you about it. <laughs> Compared to the 50 states, Puerto Rico has an unusual tax situation. Explain to our listeners how taxation in Puerto Rico, which is a U.S. Territory, differs from that in the 50 United States.

Maria: Yeah. And I'm glad you asked that question because it's very important to understand. We need to understand the political and tax situation of Puerto Rico. As you mentioned, Puerto Rico is a U.S. territory. Having said that, we are not a state. So, for tax purposes, for U.S. tax purposes, Puerto Rico is treated as a foreign country.

So, for example, if a U.S. company is going to be coming to Puerto Rico to do business, it's from the U.S. standpoint is coming to a foreign country. So, all of the rules and regulations related to international taxation will apply. The same for U.S. citizens that live in the mainland and come to Puerto Rico to invest. We need to keep in consideration all those international rules, because they will apply in the same manner.

Notwithstanding that, for U.S. citizens that are bona fide residents of Puerto Rico, like for example myself, there is a section in the U.S. Code that says that if you are a bona fide resident of a possession, which is Puerto Rico and others –  like the USVI and Guam – you are not taxed at the federal level on the Puerto Rico sourced income.

So that part provides a great gateway for a lot of tax planning. And I'm sure you have heard about people moving from the states - especially in New York, California, high tax states moving down to Puerto Rico to pay zero tax.

Jack: So not only in that situation are they escaping the normal federal tax burden that's applied, they're also escaping their state tax burden – the entire tax on Puerto Rico derived income is…

Maria:   Mm Hmmm.

Jack: To compare it U.S. federal and U.S. state taxes, it's just one tax and that tax rate is lower…

Maria: At the federal level, in the case of individuals, the highest is 33% on ordinary income. There are some special tax rates for dividends and capital gains, but the majority of the U.S. people nowadays that are talking to move in Puerto Rico and looking into two specific tax exemption programs. And I'm sure you have heard about Act 20 and Act 22.

Jack: I will confess, I have heard about it but do not remember what they are.

Maria: Okay. Puerto Rico has a very robust and extensive exemption program since the 1960s. This is not new. This is not because of the Opportunity Zones. This was here before the Opportunity Zones.

And basically, it is because of our special relationship with the states where we are a foreign country for tax purposes that allows Puerto Rico to have its own tax system that offers this type of program to incentivize investing in Puerto Rico.

Through the years, the story has been… Like in the 60s, it was to attract manufacturing plants and increase the labor and employment in Puerto Rico. Puerto Rico back then was a very agricultural economy and part of the of the economic development programs was to increase manufacturing and other type of industrialization in Puerto Rico.

Jack: Right.

Maria: So along with the local program, there were some special sections in the U.S. Code that incentivize companies to start subsidiaries in Puerto Rico. I sure you can remember the code section 936 where if a U.S. company established an operation in Puerto Rico, they will get some special treatment for the dividends and income going back to the states.

All that was part of a program to generate economic development in Puerto Rico. It was a combination of local extension programs and the U.S. part.

Section 936 went away almost 20 years ago, and Puerto Rico now is moving from a manufacturing type of economy to more of a service, research and development economy.

And what is being incentivized and still, manufacturing is incentivized, tourism is incentivized, green energy is incentivized. But also the establishing of companies in Puerto Rico to provide services to other countries from Puerto Rico. That will be Act 20. And under Act 20, if you establish your company here in Puerto Rico to provide services to companies in the U.S. or any other part in the world, you pay only four percent on your income generated from that operation.

Jack: That's the one that that really caught my ear was that four percent.

Maria: Yeah, only four percent. And then no Puerto Rico tax on dividends distributions.

So, you can be a US resident. You don't want to move to Puerto Rico anyway for some reason, but you can establish a business in Puerto Rico and move certain types of services to that operation. Of course, we need to go through analysis of transfer pricing and other nice stuff in there, but you can transfer part of that income to a jurisdiction where it was going to be taxed at four percent.  

When the dividends go out to you that you live in the U.S. – no Puerto Rico tax. But then you will be subject to U.S. tax on that dividend. The good thing is that Puerto Rico corporations’ dividends are qualified dividends for US purposes.

So, you will be paying the capital gain rate, right? The 20%... no, the 10%. So you are able to lower it a little bit – your overall tax situation.

But if that individual moves to Puerto Rico and becomes a bona fide resident of Puerto Rico, that dividend will be taxed at zero, no tax.

We don't pay taxes on Puerto Rico sourced income. So, you have no tax, only 4 percent on that income that you moved to Puerto Rico.

Jack: What are the disadvantages? We're hearing some pretty attractive opportunities for the investor in Puerto Rico, tax opportunities. What kind of disadvantages should the investor expect being in Puerto Rico?

Maria: Well, if you compare Puerto Rico to doing business in any other of the states, you might say, well yeah there is distance. There is a big ocean between the U.S. and Puerto Rico. And maybe you will say, well in Puerto Rico you don't get the services as fast as you might get in the States. And that's true. You know, sometimes you need to wait to get your cable connected or your telephone connected.

But from a tax standpoint and even from a business standpoint, you are going to be doing business under the U.S. Flag. So, you are protected as in any other state. Your intellectual property is protected, your trademarks are protected, you are under the customs and Border Patrol jurisdiction of the U.S.

Doing business in Puerto Rico is as doing business anywhere else in the States except that there's some nuances as to getting things in place.

Jack: Right.

Maria: And that might be then the biggest disadvantage that I can talk to you about.

Jack: So by and large, the disadvantages sound like they're very, very minor.

Maria: Yeah. And if you have them in mind when you come down, you will not be surprised.

Jack: Right.

Maria: So, when we talk about coming into Puerto Rico to do business, we don't say, “Oh everything is peaches and cream.” Because there are some nuances. As going to any other country to do business, there are some rules that you need to follow, and you want to play by the rules.

But the important thing is here – and it's a very important thing to stress – is if you're coming to Puerto Rico, again remember it's international for tax purposes. And you need to come supported by local experts, local lawyers, local CPAs that know the system and understand the system and of course can be facilitators for you.

Come to Puerto Rico and make these nuances easier.

Jack: Right.

Maria:   If we flip the coin - and I can say that right now, the combination of what I talked about the incentives program that we have had for many years with the Opportunity Zones program - I say Puerto Rico is, if it's not number one, it's right there in the first ones in most tax efficient and where investors can get the most benefits of their investment in these projects. The combination of the deferral of the gains with the increased rate of return on the investment - because of the exemptions, you're paying less taxes, you get more money available - the rate of return on that investment is going to be probably higher than in other places.

Jack: Right.

Maria: That combination can provide better IRRs and ROIs on your investment than anywhere else. And of course, a deal has to be a good deal before it's an Opportunity Zone deal.

Jack: Right. Everybody says that.

Maria: The Opportunity Zones and the Puerto Rico exemption program will not make a bad deal a good deal.

Jack: Well let's talk on the positive side of things. We're dealing with investors and money here, so the bias is always toward care, towards a due diligence.

But let's talk about some of the specific advantages for the Opportunity Zone investor in Puerto Rico. Let's look first at the at the financing side.

What are some of the Puerto Rico specific advantages for the Opportunity Zone fund manager and the Opportunity Zone investor?

Maria: When you talk about financing, you will have to see the whole picture. The amount to be invested by investors, the amount is going to be obtained through loans or other types of financing.

For example, in Puerto Rico, most of these tax exemption laws, like for example the tourism exemption law and the manufacturing for the research and development, if your project qualifies for this programs, part of the benefits provided in this program is that you get tax credits for the investment that is done.

They need to go through certification and computations. But for example, in the tourism program, you can get up to 40 percent of the eligible investment as a tax credit that can be monetized, it can be sold in a market, in local market. We have a market for tax credits here in Puerto Rico.

Let's say you're building a hotel and you get a $2 million credit or $3 million credit. (I've seen 10 million and 20 million depending on the amount of investment.) You can turn back around and sell that investment in a very well established and legal market and you can monetize part of the investment through the sale of the credit.

Jack: How does selling your tax credit affect your Opportunity Zone standing? Particularly I'm thinking in particular in regard to the five- and seven-year step-up in basis requirements and then of course the 10-year complete tax deferral.

Maria: Well, yeah, the credit will be generated by the developer of the project. Not necessarily by the fund or the investors in the fund.

But again, it would be part of the financing of the project. And doing all the computations – the magic of all this computation that the gurus do – it increases the rate of return because you had to look for less financing. Right?

And you're paying less interest and you know all that stuff. That in turn will benefit the investors not because they are going to be selling their investment, they are going to hold investments, so they get the deferral. But at the end they're going to get probably more dividends out or a higher rate of return on their investment.

That's one thing that we need to talk about. It's the ability of generating these credits as part of the financing scheme structure.

Jack: What are the credits are available on the development side.

Maria: We talk about the tourism and we talk about the research and development.

There is also a recent enactment and it's Act 21 of this year, which is a bill that not only conforms the Puerto Rico Law to the federal law regarding the deferral of the gain, but also introduces a new program – a new extension program - for those projects that qualify as priority projects. And I'll let you know what priority projects are in a while. And do not qualify for any of the other programs like the tourism or the green energy or the manufacturing.

That program also, even though the tax rate is not as attractive as the 4% we talk about, it's 18.5 percent, which compared to the 38 percent of the regular tax, is a good deal. It's for projects that would not qualify for other exemptions. And that also provides for a guaranteed minimum of a five percent credit of the eligible investment and can go up to 25 percent.

Jack: Okay. That's significant.

Maria: That's very significant. So, you have a guarantee but through negotiations and if the government believes this a really, really important project, you can get up to 25 percent. That means less financing from banks has to be obtained.

For a project to be considered a priority project, the law designated as a seven-member committee and this committee has to come up with a list, a very detailed list, within 60 days of approval – the 60 days are up to July 14. We are expecting this list anytime now. If you have a project that is in that list, you qualify to apply for the extension grant that we talked about. If your project is not in the list, you can go to the committee and to the Department of Economic Development and establish your case and argue your case and see if you get it to qualify as a priority project.

Jack: Okay.  So, lots of opportunity.

Maria: Yeah, and it's very powerful. There are some requirements again for the priority project that needs to be made, et cetera. And that's why it's very important to get local expert’s advice: so, you don't miss any of these requirements.

That part of the law is to attract the investment of opportunity funds from the States to come to and invest in the projects. It also as I told you conforms for the U.S. treatment. For example, remember we talked at the beginning that if I'm a bona fide resident of Puerto Rico, I don't pay tax in the U.S. for any Puerto Rico-sourced income. So, most of the capital gains that people are going to be deferring in the states for me in Puerto Rico is Puerto Rico source.

So, I would not be able to benefit from the U.S. rules because I don't pay taxes at the U.S. level. So local investors were looking for a way to be able to take advantage of things. So, this bill conforms the local capital gains treatment and makes reference to the U.S. Sections.

So now for example, for myself, if I realize a gain, I can elect to defer it under the same rules as in the U.S. with only one condition: that the property in which the money is invested – like I invest in the fund – that fund has to invest in Puerto Rico property. This is Puerto Rico Treasury telling you, okay, I'm going to allow you to defer, but yeah, you can invest anywhere and I want you to invest in Puerto Rico.

In the states they governors were limited to 25 percent of the tracts be designated as opportunity zone. Puerto Rico was able to designate 100 percent of its low-income tracts as Opportunity Zones.

So that means that most of the island, almost 100 percent of the island, is an Opportunity Zone. Because of the economic situation and the crisis that we have been going through for several years, real estate in Puerto Rico, it's probably at the lowest acquisition value so you can acquire nice beachfront properties at very good market price because the prices are low right now.

Jack: One last question about Opportunity Zones. What are some of the more common misunderstandings that clients come to you with, that they express about the Opportunity Zone program?

Maria: Yeah. Some of them come with the questions or the understanding that they cannot combine the extension programs with the Opportunity Zones program. And as we spoke about, yes it can be done. You can combine and increase your rate of return on your project. No, they're not mutually exclusive.

Jack: You're there on the ground in Puerto Rico. Give us an eyewitness report. What do you see happening in Puerto Rico as a result of Opportunity Zone investments?

Maria: There has been around on Old San Juan a lot of acquisition of vacant buildings, some very historic zones to be converted to Airbnb’s.

And today in the newspaper we saw in a very interesting news – and this goes to the fact that I talked before of combining government and private sector –the Economic Development Administration from the U.S – just granted, I think it was $6 million, to a foundation in Puerto Rico to invest in a power generation project in one of the municipalities in Puerto Rico. The EDA granted this money to this foundation to combine the money with some funds they have, and to attract Opportunity Funds to co-invest in this project to develop the power generation project for Colada.

And again, I will say that these big infrastructure projects are going to be a combination of government and private sector going together to finalize these huge projects. I know the government has identified already several projects that are going to be done in this manner. These are huge project of course.

Jack: Well Maria, you have just inundated us with opportunities to learn more, know more specific to Puerto Rico Opportunity Zone investing and development. So that leads me to the really important question. If folks need to know more and want to talk to you about it, how do they get ahold of?

Maria:   They can go to our website. You can type kevane.com and you will get our website. My contact information is there. You can look for me in LinkedIn. I have my profile and I'm very active in LinkedIn so you can connect with me through LinkedIn. I'll check my messages every day. You post a message, and we'll connect through a call or our email. I think those two will be the fastest one to get to me. I promise if you write me, I'm going to answer you and talk more about Puerto Rico and what opportunities that we have here.

Jack: And I can assure our listeners that she really does monitor LinkedIn. When I reached out to connect to you, I swear I had a response from you – it couldn't have been five minutes. She really does do that.

And listeners, the contact information that Maria gave us is also going to be printed on the podcast website. All you need to do is click on it.

Well, Maria, this has been a delightful conversation and your passion for the island of Puerto Rico and this program is very evident. Do you have any last words for us before we sign off?

Maria: If you're looking for investments and looking for opportunities, don't pass the chance to see Puerto Rico and learn about Puerto Rico. And see how Puerto Rico can feed into your plans for the future.

Jack: Well, thank you very much. Well said.

For Maria de Los Angeles Rivera, I am Jack Heald for the OZExpo podcast. Thanks for listening. Be sure to subscribe to be updated for every new episode that's published. It happens several times a week.

And we will talk to you next time.

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