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Caribbean isles share Puerto Rico's jitters over '936' tax break
The Miami Herald / April 17, 1996

By Larry Luxner

SAN JUAN, Puerto Rico -- Section 936, the backbone of Puerto Rico's factory-based economy, is in danger of being eliminated by Congress -- along with low-cost financing for tens of millions of dollars in future Caribbean projects ranging from apparel to telecommunications.

Under Section 936 of the U.S. Internal Revenue Code, companies that manufacture in Puerto Rico are partially exempt from income tax on profits earned from those operations. This complicated tax loophole, designed to create jobs and relieve Puerto Rico's massive unemployment problem, today accounts for 40% of the island's $24 billion gross domestic product.

Most members of the Republican-led Congress, however, see the program as a $3 billion-a-year drain on the U.S. Treasury, and are trying to have it phased out entirely over the next five to 10 years. While those efforts have apparently been stalled by the budget battle between Congress and President Clinton, an unrelated bill by Rep. Don Young (R-Alaska) seeks to mandate a referendum on Puerto Rico's political status by 1998 -- the 100th anniversary of the island's U.S. occupation during the Spanish-American War. Hearings on the controversial bill were held last week in San Juan, where representatives of Puerto Rico's three major political parties argued their positions.

But Section 936, which owes its existence to the island's current status as a U.S. commonwealth, may be doomed long before Young's proposed plebiscite ever takes place.

"All conditions such as 936 that promoted colonialism are no longer functional," claimed Ruben Berrios, president of the Puerto Rican Independence Party, in an interview here. "Commonwealth status has far outlived its usefulness to the United States."

Both Puerto Rico's pro-statehood governor, Pedro Rossello, and the island's non-voting delegate in Washington, Carlos Romero Barcelo, view Section 936 as an impediment to making Puerto Rico the 51st state, and have openly called for its replacement with wage credits and other mechanisms -- sparking outrage from groups such as the Puerto Rico Manufacturers Association. The PRMA warns that without 936, dozens of apparel companies which have operated in Puerto Rico for years would flee the island -- leaving 30,000 people unemployed.

"Unwarranted harm to Section 936 will bring havoc upon our economy," warned PRMA President Samuel Landol in a recent letter to President Clinton. "This tax incentive is essential for maintaining progress in Puerto Rico; it is a proven job-creating stimulus and not corporate welfare. Without jobs, the only alternative for Puerto Ricans is migration, which we must reject."

Landol's grim prognosis doesn't even consider the impact on neighboring Caribbean islands, which view Section 936 as a key source of financing for infrastructure and manufacturing investment.

Francisco J. Uriarte, Rossello's assistant secretary of state for Caribbean affairs, conceded that the death of 936 "would immediately affect the ability of Puerto Rico's financial system to extend additional CBI financing" through the Caribbean Basin Initiative.

"This whole situation has created an uncertainty that has put all projects on hold," he told The Herald. "lt's understandable. People don't want to go through the whole process of structuring 936-related investments because they might have to restructure the whole package tomorrow."

He added that "people don't understand the relationship between Section 936 and the CBI financing program. They don't know that Puerto Rico is working very hard to retain benefits for the region and further economic development."

Some regional leaders aren't convinced. They say don't want the 936 program tinkered with in any way.

"It's been a very important program for us, and it's critical that it be retained in its present form," said Richard Bernal, Jamaica's ambassador in Washington. "We have had significant funds from this program, and interest rates have been favorable. To remove that would retard investment in many sectors" including apparel and textiles.

Added Edison James, prime minister of Dominica: "The end of 936 funds will have serious repercussions on Dominica's economy. This comes at a time of lower U.S. development aid, which we can ill afford."

Jamaica and Dominica are two of 10 countries throughout the Caribbean and Central America which have signed Tax Information Exchange Agreements (TIEAs) with the U.S. Treasury. That qualifies them for so-called "936 funds," which are generally available at one or two percentage points below prevailing interest rates -- thus resulting in up to 20% savings in finance costs. The other eight nations are Barbados, Costa Rica, the Dominican Republic, Grenada, Guyana, Honduras, St. Lucia and Trinidad & Tobago. The U.S. Virgin Islands qualifies under a separate provision.

Since the program's inception in 1987 by anti-statehood Gov. Rafael Hernandez Colon, Puerto Rico's CBI financing program has promoted more than 180 projects in eligible CBI countries, creating 37,000 jobs and resulting in total investment of $2.1 billion. Of that, some $1.2 billion has been funded through direct CBI loans or bond issues from Puerto Rico's Caribbean Basin Projects Financing Authority, or CARIFA.

But if QPSII -- qualified possession source investment income -- is eliminated by Congress as it has threatened to do, "even loans that were granted three years ago will cost more in interest," says Section 936 expert Antonio J. Colorado Jr., executive director of Caribbean/Latin American Action, a private-sector lobby. "The government of St. Lucia, for instance, had to amend its laws to be able to sign the tax exchange agreement. Without 936 funds, they'll have to pay about 1% higher interest. When you're talking about a $100 million project, it's very significant."

But apparently not that significant to lawmakers in Washington.

Asked recently what his colleagues on Capitol Hill thought about the possible death of Section 936, Rep. Philip M. Crane, chairman of the House Subcommittee on Trade, just laughed. "The overwhelming majority of members of Congress haven't the foggiest notion what you're talking about," he said. "It's totally irrelevant to them."

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