With its current debt at more than $70 billion, Puerto Rico has been forced to consider new ways to balance its budget and meet its financial obligation. The territory no longer controls its own finances as of June 30, 2016, when then-President Barack Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The legislation created a new committee void of any elected Puerto Rican officials to oversee all the territory’s finances.

There are some similarities to Puerto Rico’s situation to the one we are experiencing in the U.S. Virgin Islands. In fact, just like us, Puerto Ricans have to pay two or three times as much as the average American for electricity, as they are dependent on foreign oil imports and the utility company the government owns is billions of dollars in debt.

What caused the economic turmoil in Puerto Rico?

Economists blame the downturn in Puerto Rico on two primary factors: a repeated irresponsible issuance of bonds by the local government and a decision by Congress to cut corporate tax breaks on the island.

The latter issue dates back to 1976, when Congress passed Section 936 of the Internal Revenue Code. This enabled American corporations to get tax breaks from any income originating in U.S. territories. Manufacturers decided to flock in large numbers to Puerto Rico to take full advantage of these benefits. However, in 1996, Congress voted to phase out these tax breaks over the course of 10 years, and as of 2006, they were eliminated.

Until that time, Puerto Rico had enjoyed 28 years of economic growth, but suddenly the island faced economic problems. Beginning in 2006, eight of the next 10 years featured negative growth for Puerto Rico.

New tax incentives, technology look to boost economy

Since 2008, Puerto Rico has been focused on rebuilding and signing several new tax incentives into law. Two of these, Act 73 of 2008 and Act 20 of 2012, set a new fixed income tax rate for commercial manufacturers and companies exporting services away from Puerto Rico at 4 percent. There is also a new 50 percent tax credit available for research and development activities, with the goal to bring in more technology, research and entrepreneurism to the territory.

Technology is now the foundation on which Puerto Rico looks to rebuild its economy. Infosys has made significant investments in the territory, as have Honeywell and EMI—the latter of which is building a new research lab set to create more than 300 jobs.

It will take some time for Puerto Rico to dig itself out of its massive debt, but its plan is clearly to commit to technology and entrepreneurism. For more information on the various tax credits available to businesses located in U.S. territories, consult an experienced corporate and tax planning attorney.


Tom Bot is a tax benefits attorney with BoltNagi, a widely respected and established business and corporate law firm serving clients throughout the U.S. Virgin Islands.