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Pharmaceutical Firms in Puerto Rico Consider Post-936 Strategy
Area Development / November 1997

By Larry Luxner

SAN JUAN -- Dozens of pharmaceutical firms from Abbott to Upjohn are plotting a new corporate strategy for Puerto Rico in the wake of Washington's repeal of Section 936 tax incentives.

Under a provision of the 1996 law, tax breaks for all existing factories operating under Section 936 of the U.S. Internal Revenue Code will disappear within a decade, with no federal incentives whatsoever for new investments. As such, Section 936 is effectively eliminated retroactively to Dec. 31, 1995, for any business not already claiming it. For all others, the law continues a phase-out process begun in 1993, providing a new cap on the credit beginning in 2002, and abolishing it altogether for active business income by Jan. 1, 2006, meaning that existing 936 companies are grandfathered in for the next nine years.

"Since 936 was modified in 1993, even before the repeal, there's been a significant dropoff in the number of new companies investing in Puerto Rico," said Peter Holmes, director of the Puerto Rico-USA Foundation. "Companies already there are hanging on."

In 1996, nearly $7 billion worth of medications alone were produced and exported, making pharmaceuticals the island's single most important industry and accounting for more than 25% of its GDP. At least 100 drug companies have plants in Puerto Rico, including nearly every pharmaceutical firm on the Fortune 500 list. And they churn out thousands of products, from pain reliever Anacin to the ulcer-fighting Zantac.

Besides the drugs themselves, companies also assemble health-care products such as intravenous solutions, blood-pressure kits and thermometers in island factories.

In fact, Puerto Rico's largest private manufacturing employer is Baxter Healthcare Corp., which has 6,000 workers at seven factories -- in Aibonito, Aņasco, Carolina, Guaynabo, Jayuya, Maricao and San German. Other large health-care companies operating on the island include American Home Products Corp., Bristol-Myers Squibb Co., Eli Lilly Industries, Pfizer Inc. and Johnson & Johnson.

Baxter, based in Deerfield, Ill., steadfastly denies rumors that it is pulling out of Puerto Rico or reducing its workforce substantially.

"If anything, employment has actually increased by a few hundred over the last couple of years," claims company spokeswoman Deborah Spak. Asked if the repeal of 936 is of major concern to Baxter executives, Spak didn't answer directly but said "it's not having an impact on our operations in the short term."

Holmes -- whose Washington-based organization represents 65 of the biggest 936 companies on the island -- says many U.S. pharmaceutical firms operating in Puerto Rico may give up their 936 status and reorganizing as Controlled Foreign Corporations (CFCs). That would effectively put them outside the U.S. tax code until they remit profits back to stateside headquarters. CFCs, says Holmes, "provide a deferred tax benefit that can be put off for many years if the company is global and can invest its Puerto Rican profits in properties around the globe."

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