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Puerto Rico - Tax on Legal and Financial Services

The bankruptcy of the Commonwealth of Puerto Rico is unfolding as one of the biggest public bankruptcies in the United States. Puerto Rico has roughly $72 billion in debt and an additional $50 billion that it owes in pensions to its public employees.

As the legal bills continue mounting, Puerto Rico lawmakers are seeking a bill that would tax the fees collected by legal and financial experts work on the debt restructuring. The cost of legal and financial fees – as of May 31 – has hit $228.4 million. The proposed bill states that the Puerto Rican government would collect a 29 percent tax on any fees paid for work not done on the island itself. Given the situation in Puerto Rico, most of the top lawyers and financial experts are based in the mainland United States.

While the Commonwealth is attempting to generate revenue, it is likely that taxing the legal and financial services will be counterproductive. Should the tax become law, most firms would have to increase the fees they charge in order to offset the rising taxes. Since the Commonwealth is the client of these services, the cost of the taxes will then fall back on them.

Additionally, some Puerto Rican lawmakers found that since the Commonwealth is the source of the income, a taxation on fees which are typically federally taxable could conflict with the IRS since a federal entity cannot tax the federal government.

This development is an interesting one to keep an eye on as the cost of the bankruptcy reaches new heights.

Authored by: Cristina Vanea, Associate

 

Melissa Ditto