Federal tax policy has traditionally recognized the unique relationship of Puerto Rico to the United States and has helped foster a strong manufacturing sector in the territory. Indeed, manufacturing is the leading private-sector employer and represents almost one-half of Puerto Rico’s economy.
Since 2006, manufacturers operating in Puerto Rico—which pay taxes under the Internal Revenue Code—have been eligible for the Section 199 deduction for domestic manufacturing income, a provision that has been available to other manufacturers in the United States since 2004. Extending this incentive to Puerto Rican manufacturers provided consistent tax treatment for manufacturing operations under U.S. tax law, with one notable exception. Unlike the Section 199 deduction for most manufacturers in the United States, the Section 199 deduction for Puerto Rican manufacturers is temporary and, despite several extensions, is now set to expire at the end of 2016.
If the Section 199 Puerto Rico provision expires, American manufacturers operating in Puerto Rico would pay high U.S. taxes relative to the U.S. tax cost of operating in any of the 50 states or the District of Columbia, effectively disincentivizing manufacturing operations in Puerto Rico.
Here at the NAM, we believe that manufacturers paying taxes under the Internal Revenue Code should be treated consistently throughout the United States, regardless of the jurisdiction in which they are operating. In light of the important role that U.S. tax policy plays in the economy of Puerto Rico and the current challenges faced by the island, it is more important than ever for Congress to extend the Section 199 deduction for manufacturers in Puerto Rico before it expires at the end of 2016.