Puerto Rico businesses fret tax hikes will erode profits

Fri Sep 18, 2015 1:04am EDT
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By Nick Brown and Megan Davies

SAN JUAN/NEW YORK (Reuters) - Business is tough enough already for Carlos Jimenez without having to face higher taxes. Fast Lane, his three-location car-wash chain in Puerto Rico, has laid off about half the 106 employees it had in 2007.

"Every year you take out two or three people, make your business leaner," he said.

But starting in October, entrepreneurs like Jimenez will see their taxes rise to 11.5 percent on some business-to-business (B2B) dealings, and expand to include a 4 percent duty when using professional services such as accountants and lawyers. The sales tax also rose, from 7 percent to 11.5 percent, in July.

The new levies come as the Puerto Rican government pursues a plan to jumpstart its foundering economy and claw its way out of a $72 billion debt hole in part by spurring small business growth. The plan also asks bondholders to take reduced payouts on $18 billion of debt, and proposes changes to the government's operations.

While the proposed benefits of the plan are uncertain -- requiring legislation or U.S. government action -- the taxes are real, and some business owners worry they'll offset future benefits.

Jimenez, for example, said he's willing to get on board with the tax hikes, but only if the government can follow through on other parts of its turnaround plan, such as securing concessions from bondholders.

Some business advocates said high taxes could mean slower corporate development and layoffs as well as higher prices for consumers.

"Do you want poorer consumers?" said Jaime Morales, a former small business advocate and now city manager in seaside Cabo Rojo. "That shouldn't be the goal."   Continued...

Puerto Rico's Governor Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan, Puerto Rico April 30, 2015. REUTERS/Alvin Baez