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Doing Business in Puerto Rico

Doing Business in Puerto Rico

Though Puerto Rico has struggled through financial turbulence recently, this small yet well-developed Caribbean island still has much to offer those interested in business expansion. Prior to its current period of financial difficulty, Puerto Rico was widely considered to have one of the most dynamic economies in the region, along with strong infrastructure and a well-educated, bilingual workforce.

Since 2006, however, debt issues have continued to trouble the island, driving down growth and prompting some of Puerto Rico's younger workers to depart for the United States. In order to help resolve this ongoing crisis, Puerto Rico entered a process similar to bankruptcy on May 3, 2017, in a New York court. The island's governor, Ricardo Rossello, then announced a plan to slash government payrolls and purchase expenses (by 13 percent and 40 percent, respectively) on May 31, 2017, while also lowering taxes and creating a reserve fund to protect workers from potential furloughs.

The prospect of achieving full statehood—an outcome which could potentially help Puerto Rico further strengthen its economy—also received a boost on June 11, 2017, when island residents voted overwhelmingly in favor of becoming the 51st U.S. state. It should be noted, that the referendum was non-binding, and the outlook for statehood remains unclear for now. Regardless of the eventual outcome, these recent developments should encourage businesses to take a fresh look at Puerto Rico when evaluating overseas expansion options.

Reasons for Doing Business in Puerto Rico

Despite its recent economic strife, Puerto Rico remains a land of opportunity for businesses and investors. Due in part to its status as a U.S. Commonwealth, the island has modern infrastructure, a large public sector and an institutional framework guided by the regulations of U.S. federal agencies, most of which maintain a presence in Puerto Rico. United States federal laws, such as those governing intellectual property, also apply in the Commonwealth, something that provides businesses with a degree of stability. Because of the island's proximity to the U.S. mainland, it also enjoys well-established transportation networks and serves as an access point to the vast U.S. consumer market.

While the island shares a regulatory framework with the U.S., it retains its own favorable foreign tax structure—something that offers expanding businesses a competitive advantage. Puerto Rico's government implemented a series of tax incentives in 2008, aiming to lure more overseas development in the process. The two most effective of these laws (Acts 20 and 73) established a fixed, four percent tax rate for commercial manufacturers and service exporters. In an effort to promote innovation and entrepreneurial activity, Puerto Rico also instituted a 50 percent tax credit to offset research and development costs incurred by businesses.

These moves have helped create sustained investment interest from firms in the technology sector. Puerto Rico's pro-innovation policies dovetail nicely with the general trend in technology toward developing technical hubs and collaborative partnerships with local academic centers. Ideally, Puerto Rico's efforts to promote innovation will lead to novel academic programs and new revenue streams, as the private sector and the island's top universities work together to further research and development goals.

One such example of the island's new entrepreneurial posture is the recent creation of the Technology Transfer and Commercialization Office, which helps develop and commercialize intellectual property created by the island's universities. The office, which also provides income tax breaks for researchers working in grant programs, was created by the Puerto Rico Science, Technology and Research Trust.

Because of Puerto Rico's unique position, businesses can experience much faster growth than typically seen in more highly-developed markets in the U.S. and Europe. Additionally, Puerto Rico possesses a well-educated, largely bilingual workforce and a cost of doing business that comes in 10 percent lower than on the U.S. mainland. When combined with its competitive tax system, Puerto's Rico's robust infrastructure and other internal advantages make it one of the more attractive markets for investment in the Caribbean region.

Challenges of Doing Business in Puerto Rico

While Puerto Rico's mix of new, pro-growth policies and structural advantages make it an intriguing market for overseas expansion, there are also some considerations of which businesses should be cognizant.

Perhaps most prominently, doing business on the island is markedly more difficult than operating in the U.S. (The two are ranked 55th and 8th in that regard, respectively, by the World Bank.) Regulations, the permitting process, and other "red tape" challenges have historically been a drag on getting businesses operational quickly. Governor Rossello has committed to a set of policies designed to make Puerto Rico more business-friendly in recent years. Rossello initiated a series of labor reforms to make markets more competitive and attractive to investors, while also expanding public-private partnerships and expediting the process for new construction. Puerto Rico's government has also worked to streamline and digitize the permitting process, creating a single online hub where businesses can track down and file key information.

The ongoing economic crisis has also made operating in Puerto Rico more challenging. Budget cuts have strained the island's higher education system, while a lack of financial prospects has encouraged many of Puerto Rico's brightest young workers to depart for the United States; more than 500,000 residents have migrated to the U.S. in the last decade alone. This "brain drain" effect has deprived Puerto Rican businesses of some of the island's best workers. Additionally, an aging population has further eroded the island's tax base while creating a massively underfunded pension liability that runs into the billions, which has put even greater strain on the budget.

Infrastructure, too, has been affected by the island's financial turmoil. In an effort to save money, Governor Rossello has proposed various cuts to spending in multiple departments, including education, housing and agriculture. These cuts also include millions in subsidies awarded to municipalities for local services such as garbage collection.

Conclusion

It can sometimes take years for a company to accrue enough local knowledge to operate without needless difficulty. This interval can be greatly shortened by partnering with experts who have a deep awareness of local laws and regulations. This is doubly important when it comes to the more challenging aspects of expanding operations in a foreign region.


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