Not only is the Puerto Rico government carrying over $70 billion in Puerto Rico debt and $40 billion in unfunded pension liabilities, the recent tax bill just signed by President Trump has called for a 12.5% tax on intellectual property income made by companies operating in Puerto Rico.
After being battered a few months ago by hurricane Maria which devastated the Island Commonwealth’s power infrastructure, Puerto Rico is continuing to take hits financially.
The tax bill would make it less attractive for companies in Puerto Rico to stay there, thus adding another blow to the economy.
“We’re pretty much just getting ready for Maria Part 2,” according to one economist in Puerto Rico, quoted recently by CNBC.
Puerto Rico is desperate for any source of revenues to sustain itself, but the tax provision is likely to hurt its economy and stifle any investment in the island by manufacturing companies.
Indeed, the new tax plan will cause a tremendous amount of pain for the island.
“The final version of the Republican tax plan would end some of the tax advantages companies with operations in Puerto Rico have long enjoyed, potentially delivering an economic blow to the territory still reeling from Hurricane Maria and a record setting bankruptcy,” according to a report this month on Bloomberg News. “One tax expert said that under the new rules subsidiaries of U.S. companies based on the island would be treated as foreign, subject to a tax from income derived from intangible assets held offshore.”
Further, Puerto Rico homeowners face massive foreclosures for homes that have been damaged or destroyed from Hurricane Maria. According to a recent New York Times report, about one-third of the Island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Some 90,000 of these borrowers became delinquent as a consequence of Hurricane Maria, according to the Times.
“Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida in the past decade,” the Times reported. “If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit, where abandoned homes became almost as plentiful as occupied ones.”
Not surprisingly, Wall Street banks and private equity investors, including Credit Suisse, Goldman Sachs and Blackstone, have scooped up distressed residential mortgages, according to the article.
And there’s more. A recent CNBC report entitled “Broken Bonds” highlights the fact that over 2,000 arbitration claims charging investment fraud have been filed against brokerage firms in Puerto Rico that peddled closed-end bond funds and bonds to the island’s residents, resulting in huge losses to investors. CNBC reports that investors have won settlements or awards in investment fraud cases totaling $330 million to date, with many more years of litigation to come.
It’s hard to see much upside for Puerto Rico investments, economy or residents given the steady shocks it is facing.
Let’s hope that 2018 is a better year for Puerto Rico.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.