|
 "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."
Jimenez says he's cautiously optimistic the government's plan can
help ebb his company's spate of layoffs. "I hope it ends here," he
said.
AMBITIOUS PLAN
The turnaround plan, presented by Puerto Rican Governor Alejandro
Garcia Padilla, would also promote corporate growth by overhauling a
tax compliance structure that can disadvantage small businesses with
limited resources; lengthen probationary periods for workers; and
reduce labor costs by freezing the minimum wage and eliminating
Christmas bonuses.
Business owners said they support some of those measures, primarily
tax simplification and probation extensions, which give them more
flexibility to fire.
But there's no guarantee the plan will come to fruition, and in the
meantime, taxes will climb.
And starting next April, all business-to-business and professional
services transactions will be subject to a 10.5 percent value added
tax, with a 1 percent municipal sales tax. Businesses may also
become eligible for tax credits at that time, which could give them
some relief.
Alberto Bacó Bagué, secretary of Puerto Rico's Department of
Economic and Commercial Development, said he wants to hear business
owners' concerns.
"Taxing more is not the solution, it's taxing more intelligently,"
Bacó told Reuters at an event to mark a new hotel project in San
Juan's tourist district. "This plan ... has a spirit of discussion.
That's part of what we want to generate, to see what (business
owners) think."
The tax measures, while part of the turnaround plan, have already
been signed into law. And they are already hurting businesses that
either have to pass the costs onto customers or take a hit on their
profits.
George Pavarini, a Puerto Rico-based builder and architect who
develops affordable housing, says he's being squeezed as his costs
on nails, concrete and other supplies rise with the added tax, while
the housing he develops has capped sales prices.
"I'm not selling eggs, where I can raise the price to absorb that,"
says Pavarini, who is hoping for an exemption to the rises. "I end
up absorbing directly the increases."
Instead, Puerto Rico should be focusing on growth, business owners
said.
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"I think the focus should be on stimulating businesses that export,"
said Pavarini, adding that he has lost labor and clients to the U.S.
mainland as Puerto Rico's economic woes have worsened. "I don't
think people see light at the end of the economic disaster tunnel."
Pavarini said he saw enough demand to continue with his business,
although he would proceed cautiously.
To be sure, Garcia Padilla's plan proposes continued investment in
infrastructure, including $1.4 billion for water authority PRASA,
which has been a focus amid an ongoing drought.
Humberto Reynolds, president of the Puerto Rico chapter of the
Associated General Contractors of America, supports the investments.
“The better alternative to promote growth and hiring is to create a
healthy investment environment … and how you achieve that is through
infrastructure,” Reynolds said.
Employers reacted more tepidly to measures in the plan that would
freeze the minimum wage and cut bonuses, saying they don't believe
the savings would have a big enough effect to justify the increased
pain for workers.
"Right now people cannot even afford a $5 car wash," said Jimenez.
"If you cut their salary more, I don't think it will make the
economy better."
A minimum wage freeze could avoid layoffs that sometimes result from
wage hikes as companies look to offset costs. But it could also
discourage tax reporting, exacerbating the already problematic
underground economy in Puerto Rico, where only about 40 percent of
the working age population is in the workforce.
One San Juan resident, who works seven days a week as a driver for
about $40,000 a year, admitted to under-reporting taxes, saying it’s
necessary to afford a living wage.
"I believe in work, and most people believe in work, but the
compensation has to be there," the person said. "Poor people like
money too. You have to incentivize regular people, not just the
rich."
Bacó acknowledged that labor cost reductions "have to be further
discussed."
"I believe in the theory of abundance and I would like to give more
benefits," Bacó told Reuters. "I would like the people in Puerto
Rico to make more money."
But Bacó also said the plan is a good start, saying corporate tax
overhauls and infrastructure investments would help businesses.
The plan "recognizes investment, that we need to invest in Puerto
Rico, that we need to finish basic infrastructure," he said.
San Juan Mayor Carmen Yulin Cruz told Reuters last week that
bondholders should take more of the pain, as workers have already
made sacrifices. "You don't revive your economy over the shoulders
of those who will build it," Cruz said.
On the other hand, said Height Securities analyst Daniel Hanson,
bondholders are likely to demand more austerity, not less, as a
condition for concessions.
(Reporting by Nick Brown in San Juan; and Megan Davies in New York.
Additional reporting by Jessica DiNapoli and Suzanne Barlyn. Editing
by John Pickering)
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