Puerto Rico

Puerto Rico

April 01, 2004

Puerto Rico is debating whether to impose a 29% withholding tax on interest payments on some commercial bank loans.

The withholding tax is collected currently only on cross-border loans from related parties of the borrower.  The governor is considering whether to propose also collecting withholding tax on loans from banks outside Puerto Rico.  An aide, Genol Hernandez, said the governor is still collecting comments and has not decided yet what to propose.  The Puerto Rican bankers association has suggested a compromise under which only a 10% withholding tax would be collected with “grandfathering” for existing debt.  Owners of large infrastructure projects have complained that any tax that applies to existing debt would impose large unexpected costs on their projects.  The EcoEléctrica and Guayama power projects have combined debt of $1.3 billion, much of it from nonresident lenders.  Centennial, a large telephone company on the island, has complained to the governor that it has $825 million in debt that would potentially be affected.

The Puerto Rican Congress, which would have to pass the tax proposal, is expected to be in session this year only until late June.  The governor is running for reelection in November.

Keith Martin