Bobbin / March 1996
By Larry Luxner
MIAMI -- Low-cost financing for tens of millions of dollars in future Caribbean and Central American apparel projects could be endangered if Congress eliminates a complicated tax incentives program aimed at creating jobs in Puerto Rico.
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 opera-tions. This clause is the backbone of Puerto Rico's manufacturing sector, which accounts for 40% of the island's gross domestic product.
Some members of Congress, however, say the program is a $3 billion-a-year drain on the U.S. Treasury. Both Puerto Rico's pro-statehood governor, Pedro Rosselló, and the island's non-voting delegate in Washington, Carlos Romero Barceló, view Section 936 as an impediment to making Puerto Rico the 51st state, and have openly called for its elimination -- 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. That doesn't even consider the impact on neighboring Caribbean islands, which view the program as a key source of financing for infrastructure and manufacturing investment.
In a recent speech in Miami, Francisco J. Uriarte, Rosselló'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.
"We understand that the Caribbean Basin countries are gravely concerned with the apparent loss of such a valuable financing mechanism," said Uriarte, speaking to several hundred executives attending the 19th annual Miami Conference on the Caribbean and Latin America. "We are thus asking your assistance and support in conveying to Congress and the Clinton administration the importance of not terminating Section 936 without providing Puerto Rico and the Caribbean Basin with the necessary tools to continue working towards economic prosperity."
Rosselló's alternative plan, he suggested, "would maintain those provisions of the heretofore applicable Section 936 which allow the lending of low-cost funds to eligible Caribbean Basin countries" that might otherwise have no access to such loans.
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.
In Costa Rica, projects which have benefitted from 936 loans include Inversiones Zeta S.A. ($5.5 million for factory shells for industrial parks in Cartago, Alajuela and Heredia); Lovable Brassiere ($600,000 for construction and furnishing of a plant to increase production capacity), and Warner's ($3.8 million for purchase of equipment to expand production of women's intimate apparel).
In the Dominican Republic, Puerto Rico's 936 funds have financed $11 million of a $16.9 million project for Bratex, which used the money to buy equipment, train personnel and install 400 sewing machines. And in Honduras, the money paid $5.2 million towards a $9.2 million for Elcatex for the production and cutting of textiles. Another $4 million was loaned to Olga de Villanueva for the purchase of sewing machines.
But when QPSII -- qualified possession source investment income -- is eliminated by Congress on Jan. 1, 1996, "even loans that were granted three years ago will cost more in interest," says Section 936 expert Antonio J. Colorado Jr., who has just been named executive director of Caribbean/Latin American Action, a Washington 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."
Despite Uriarte's pronouncements on the current administration's "commitment to the Caribbean," Rossello didn't attend the annual four-day gathering -- marking the first time in several years that a Puerto Rican governor wasn't present. Yet neither did many other leaders. In fact, the only heads of state that came to Miami were Dominica's Edison James, and Nicaraguan President Violeta Chamorro.
The meeting was, however, well represented by the U.S. government, including two Congressmen -- Benjamin A. Gilman, R-N.Y., and Philip M. Crane, R-Ill., chairman of the House Subcommittee on Trade.
Asked what his colleagues on Capitol Hill think about the possible death of Section 936, Crane 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."