In October, Puerto Rico grabbed headlines in the life science industry with a 4 percent tax hike aimed at businesses domiciled off the Caribbean island.
The measure, set to take effect Jan. 1, levies a 4 percent tax in 2011. The rate falls to 3.75 percent in 2012, 2.75 percent in 2013, 2.5 percent in 2014, 2.25 in 2015 and 1 percent in 2016, after which it will lapse.
The medical device, biotech and pharmaceutical industries were quick to howl that the tax, part of a slate of reforms aimed at turning around the U.S. commonwealth’s economic fortunes, would be a serious hindrance to their businesses in Puerto Rico:
"AdvaMed members are major employers in Puerto Rico, providing more than 15,000 jobs, or roughly 13 percent of the island’s manufacturing jobs. … I am very concerned that this tax sends a very bad message to our members and will significantly impact device manufacturers’ ability to maintain and grow their manufacturing facilities on the island. The imposition of this tax will quickly erase all of the positive impressions of Puerto Rico that our members received last week as the Puerto Rico Industrial Development Co. exhibited at and helped sponsor the industry’s premier conference, AdvaMed2010." — Stephen Ubl, president and CEO of the Advanced Medical Technology Assn.
"Last year, America’s biopharmaceutical companies invested more than $65.3 billion into the research and development of innovative life-saving and life-enhancing new treatments. Many of those treatments were researched or manufactured within the Commonwealth," according to the PhRMA statement. "Law 154 will dramatically hinder these companies’ positive efforts within Puerto Rico." — the Pharmaceutical Research and Manufacturers of America
"This new tax increase will profoundly affect the decision-making of foreign corporations as they consider whether to continue to do business and deploy their capital in Puerto Rico. … The bioscience industry has remained a bright spot through one of the worst economic recessions on record. This is particularly true in Puerto Rico, where the bioscience industry accounts for over five percent of the employment base, providing stable, high-paying jobs. Without a doubt, the bioscience industry is crucial to the economic health of Puerto Rico." — the Biotechnology Industry Organization
The foofaraw did not go un-noticed on the Isla del Encanta, which promptly invited a group of journalists to tour a portion of the island’s medical device manufacturing base (disclosure: I went along on the trip, which was paid for by the Puerto Rico Industrial Development Co., a quasi-public development agency).
The truth is that offshore companies have it pretty good in Puerto Rico, despite the new tax — which, if it helps right the islands economic ship, will be a long-term boon to those firms. Puerto Rico offers a highly educated workforce, graduating about 30,000 college students each year (not bad for an island with a total population of around 3.8 million people) and the lowest labor rates of any U.S. region. Because it’s a U.S. commonwealth, it also gives companies with operations there access to U.S. free trade zones and customs, the American legal framework (including intellectual property protection), the U.S. currency and banking system and passport-free travel to the Caribbean.
Then there are the tax incentives. Here’s a look at just a few (there are many, many more):
- A standard 4% fixed income rate and 12% withholding tax on royalties;
- An alternative 8% fixed rate and 2% royalty withholding;
- Rates of 0% or 1% for "pioneering activities" (read "products developed in Puerto Rico");
- Tax credits for products bought locally;
- $5,000 per Puerto Rican job created;
- 50% tax credit for R&D expenses;
- Up to 10% for energy (a sop to offset the islands high energy costs);
- 60% exemption from municipal license taxes;
- 90% exemption from state and local property taxes.
Add to that a tropical climate and wealth of natural resources (amazing beaches, the only rain forest in the Northern Hemisphere, great food, fishing and recreational activities) and you begin to see the draw for offshore companies.
To be sure, there are negative aspects to consider. Portions of the island suffer from abject poverty and, like any island economy, prices are usually higher than on the mainland.
And crime is a serious problem in Puerto Rico; the rate of violent crime rate per 100,000 residents was 239.9 in 2008, according to FBI statistics. Compare that with the next-highest metropolitan area with more than 250,000 residents, St. Louis, which logged 20.7 violent crimes per 100,000 residents (the overall U.S. average was 8.2 incidents per 100,000 residents).
The bulk those crimes were robberies; there were 138.3 robberies per 100,000 Puerto Rican residents in 2008, according to the FBI. As a result, most who can afford it live within gated communities.
But the benefits for medical device makers clearly far outweigh the downsides. Just consider this list of 31 companies, which together operate 37 facilities in Puerto Rico, according to PRIDCO:
- 3m Co.
- Abbott Medical Optics
- Aspen Surgical
- Baxter (two facilities)
- Becton Dickinson (two facilities)
- Boston Scientific
- Cardinal Health
- Classic Industries
- Cordis (JNJ)
- CR Bard
- Edwards Lifesciences
- Ethicon (JNJ)
- Fenwal (two facilities)
- Integra Neuro Sciences
- Medtronic (three facilities)
- Roche Diagnostics
- St. Jude Medical (two facilities)