A new federal report scrutinizes Puerto Rico’s tax incentives luring wealthy Americans

SAN JUAN, Puerto Rico (AP) – Puerto Rico tax incentives that have lured thousands of rich Americans to the U.S. territory for over a decade are under scrutiny after federal legislators released a new report on Friday by the U.S. Government Accountability Office.

The report found that the island’s exemptions could amount to hundreds of millions of dollars a year, and it urged the International Revenue Service to improve its oversight, warning that some recipients “may not be meeting their federal tax obligations.”

The report was requested in July 2023 by Democrats in the U.S. House Natural Resources Committee to investigate how the tax breaks “could create an unfair tax haven for the ultra-wealthy and do nothing to benefit the people of Puerto Rico.”

U.S. Rep. Jared Huffman, a California Democrat, said in a statement Friday that after President Donald Trump’s administration downsized the IRS, “there’s barely anyone left to check if these wealthy transplants are even playing by the rules and meeting the basic residency requirements to justify these tax breaks, let alone contributing to the community.”

The report stems from an audit that began in December 2023 and ended this month. It noted that Puerto Rico granted more than 5,800 resident investor incentive decrees and nearly 3,900 export service business ones from 2012 through 2024.

A majority of the resident investors come from California, followed by Florida, New York and Texas.

The IRS announced in 2021 that it would look into concerns that some people might be dodging their federal tax obligations.

That “campaign only recently began showing results, in part, due to the complexity of high-income and high-wealth audits, IRS not prioritizing the effort, and communication gaps between IRS and Puerto Rico,” the GAO report said.

It also noted that until this year, the IRS was unable to obtain complete data on those claiming the investor incentive with Social Security numbers to ensure compliance. The IRS also had no plans to get updated data from Puerto Rico and didn’t pursue U.S. taxpayers identified by Puerto Rico as those not meeting the territory’s residency requirements.

The report offered an example from August 2023, noting that Puerto Rican officials shared an audit identifying 179 taxpayers that did not provide evidence to meet a residency requirement.

“One (IRS) … official reviewed a few cases before determining the referrals did not need to be prioritized,” the GAO stated.

U.S. Rep. Alexandria Ocasio-Cortez criticized the exemptions, asserting that “not only is this policy driving up wealth inequality on the island, it is also stealing valuable federal tax revenue used to fund Social Security, Medicare, and other essential federal programs out of American’s pockets.”

The GAO noted that in 2024, the Democratic staff of the U.S. Senate Committee on Finance launched an independent investigation into oversight of the exemptions.

The IRS has stated that it agrees with the GAO’s recommendations and that is has taken steps, including talking with Puerto Rico treasury officials to agree upon a yearly request of data.

The incentives, created by former Gov. Luis Fortuño in 2012 to try and boost the local economy, only apply to those who come from outside Puerto Rico and meet certain requirements.

The exemptions have long been criticized on the island of 3.2 million people with a more than 40% poverty rate, with some local officials noting that they have contributed to a rise in the cost of housing, among other things.

The export services act commonly known as Act 20 offers incentives including a 4% corporate tax rate and 100% exemption on dividends or profit distributions.

Meanwhile, the individual investors act known as Act 22 targets wealthy individuals who relocate to Puerto Rico and offers 100% exemption on dividends, interest and long-term capital gains.

A study, commissioned by Puerto Rico’s Department of Economic Development and Commerce and released in 2019, found that the exemptions created more than 36,200 jobs and generated more than $2.5 billion in investments.

A 2024 study by the agency estimated that in 2022, individuals who received the incentive had established more than 1,000 businesses and paid more than $200 million in taxes and donations to Puerto Rico, while the incentives cost the government $184 million. The study also estimated that export service businesses employed roughly 22,000 people directly.

Puerto Rico’s Treasury Department has estimated that from 2020 to 2026, the government will have foregone $4.4 billion because of individual investor incentives and $1.8 billion because of export service business incentives.

Meanwhile, the GAO said that “Puerto Rico’s economy has shown little or no growth” since the incentives were introduced in 2012, but added that “it is not possible to measure what growth or decline would have been without the incentives.”

It also noted that two major hurricanes, a series of earthquakes and the pandemic have affected economic indicators.

Puerto Rico has since tightened compliance and reporting requirements for wealthy outsiders to address concerns and help boost the economy, including doubling to $10,000 a mandated individual annual donation to nonprofit organizations.