IRS punts on secret $6 billion bailout for Puerto Rico

The Obama administration says it can’t decide whether U.S. taxpayers should be on the hook for $6 billion in tax increases levied by Puerto Rico, but businesses are eligible for the disputed tax credits in the meantime.

And, if the IRS eventually decides the credits were improper, those firms won’t have to pay back the billions of dollars they already received.

As reported by The Daily Caller in January, critics have charged the highly unusual arrangement would comprise an indirect bailout that lets Puerto Rico bolster its sagging fiscal state by levying taxes on international firms those firms don’t actually have to pay.

The IRS is deciding whether to approve the tax credits or deem it a “soak up tax” that targets firms which can offset their tax increases with U.S. tax credits.

Then, a decision was supposed to come any day, but the IRS shirked from the controversy, waiting three months before quietly announcing last week it is not making a final decision.

“The provisions of the Excise Tax are novel. The determination of the creditability of the Excise Tax requires the resolution of a number of legal and factual issues,” the IRS said in a notice issued last week.

In the meantime, IRS says it “will not challenge” businesses seeking tax credits for the excise tax and, if it ever did decide the arrangement was improper, they wouldn’t need to pay back the Treasury for the credits.

“Any change in the foreign tax credit treatment of the Excise Tax after resolution of the pending issues will be prospective, and will apply to Excise Tax paid or accrued after the date that further guidance is issued,” the notice says.

The back story

Puerto Rico, desperate for revenues in the midst of the recession, surprised industry with a $6 billion tax on foreign firms – including a significant bloc of U.S. pharmaceutical firms – late October in a rare weekend legislative session without any public debate in advance.

Gov. Luis Fortuño signed the new tax into law Oct. 25. That day, the Washington, D.C.-based white shoe law firm Steptoe & Johnson issued him a legal brief arguing U.S. firms should receive money from the U.S. government to offset the Puerto Rico tax increase, which Fortuño sent to the IRS.

The international tax law in question is complicated, but experts agree the tax, and the request, are an unusual use of portions of the tax code intended to avoid double taxation on U.S. firms in countries that have reciprocity treaties with the U.S.

“We would call it creative,” said James Hines, an expert on international tax issues and the L. Hart Wright Collegiate Professor of Law at the University of Michigan Law School. “It’s an unusual tax for sure.”

It’s an “indirect bailout,” said Dan Mitchell, an international tax expert and senior fellow at the Cato Institute.

Factions within the IRS are fighting over the decision.

  • JulianG3

    There are provisions in the Regs under this IRC Section to prevent a country from imposing taxes on a US Corporation with the knowledge that the company will get a tax credit under the foreign tax credit provisions. Usually, if country X imposes a tax on a US multinational with the knowledge that the company will get a tax credit, this is subject to strict scrutiny by the IRS, otherwise the US Treasury would be subsidizing a number of third world countries. So, the answer is that the provisions already exist to deal with this situation. In this case you have to ask if there was a quid pro quo.

    JulianG3, LL.M. Tax

  • ED4237

    Time to cut the cord with them. Time to say live on your own and run your country by yourself and no company should get bailed out because they did business somewhere and their taxes went up price of doing business.

  • Drahcir

    Carefull everybody, The joke in the white house may get his fifty first state.Wonder how many more he want to make fifty seven?

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  • Tess_Comments

    U.S. firms should NOT receive money from the U.S. government to offset the Puerto Rico tax increase. U.S. Firms decided to move to PR, let them deal with PR taxes.

    The U.S. Firms can always re-locate back into one of the United States if they are not happy with PR Taxes.

  • teapartypatriot

    “IRS punts on secret $6 billion bailout for Puerto Rico”

    A legitimate question: Would the “You Lie!” hussein regime have allowed this rip-off of US taxpayers from a country that is NOT primarily black?

    • loudog

      a 2000 census showed an 8% black population

  • jdw

    It is time to let PR go its own way! Cut them off now! No more votes, no more SS, no more welfare!

  • loudog

    US firms are “foreign”? Time for that vote on independence or statehood.

    • virginiagentleman

      Yep, that vote is way overdue.

      • alpha_male

        They are already the biggest recipient of SSI disability. They’ve lived off the fed gov’t way too long.

        • robrex

          It’s not like we wanted to be a part of the US. Don’t forget, you guys wanted us, not the other way around.