Understanding the Acts 20, 22 law
Understanding the Acts 20, 22 law
and the economic transformation of Puerto Rico
After a couple of years of hard work promoting the incentives laws of Puerto Rico, the economic development team is now taking its time to examine, explain and make everyone really understand the huge impact that these laws are having in the Island. Secretary of the Department of Economic Development and Commerce Alberto Bacó Bagué said recently in the article Incentive Laws 20 and 22 Positive Impact “When we set out to plan a new strategy to attract knowledge-based capital and technology to Puerto Rico we were cognizant that it had to be consistent with the growth of the world economy or we would risk discouraging potential investors. To achieve this, the island had to complete its transition from a manufacturing to a service economy based on existing competitive advantages before any growth could take place.”
It is important to point out that the tax incentives laws that are being promoted are not exactly new ones. All of them existed when the present administration took office in 2013. What is different now is that the laws are being promoted as a package of incentives that suit almost any type of company. And now, as Bacó Bagué has stated in the article “Three parallel ecosystems coincide for the first time at equal strength and potential growth: a traditional, an entrepreneurial and a service-export one. This has resulted from the combination of new and existing talent joining to take advantage of the tax-incentive laws available to everyone. Exporting services creates economic activity and growth, and when done properly, is proven to be beneficial because good scaling policy supports economic development. The combined effect of these laws is a powerful tool to retain capital and resources as more people relocate to Puerto Rico. ”
Let’s focus now on Acts 20 and 22 and how they are becoming powerful tools in this new scenario. Puerto Rico’s Economic Development and Commerce Department (EDCD) recently presented the results of a study aimed at establishing the actual effects and the economic projections of Laws 20 and 22, which attract foreign investors, stimulate local entrepreneurs and promote services exportation. The study “Impact of Acts 20 and 22 on the Economic Transformation of Puerto Rico” was prepared by Estudios Técnicos Inc., directed by the well known Puertorican economist José Joaquín Villamil.
The planning, economic counseling and market strategies independent firm concluded that both incentive laws could generate more than 56,000 jobs in a 10 year period. To do so Estudios Técnicos combined data from 2014 Annual Report with information provided by decree holders in the application forms to estimate jobs created, fiscal revenues, investment and consumer spending. As of November 2015, 328 Law 20 and 574 Law 22 decrees were approved by the government. Laws 20 and 22 were implemented in 2012.
According to the study, the main services provided by most Act 20 companies are Financial Consulting, Advertising and Public Relations, Financial Services, Centralized Management Services, Professional Services (legal, tax and accountant), Development of Computer Software and Engineering and Construction Designs production. Close to 20% of Act 20 grantees are local businesses and close to 80% foreign. More than 50% of exports are destined to the United States market, followed by the Dominican Republic and Mexico markets, respectively. “Services exportation generates high-quality employment opportunities and high value-added investments. Annual payroll averages close to $45,000 per job and businesses had a total payroll of $137.1 million. This payroll estimate includes 7,033 total employments from direct, indirect and induced jobs. Employment in the technical services industry has increased between 2012 and 2014 by 6.4%, which could be attributed to laws 20 and 22 because many of the investors that take advantage of these laws offer these services. Another great part of new companies investment has been in real estate,” stated Villamil. The economist added that Act 20 companies have reported total revenues of almost $1.2 billion with a $563 million net income, which provides fiscal revenues of almost $34 million in corporate income taxes.
It’s estimated that by 2024 other 3,500 decrees will be added, which are expected to generate approximately 44,656 employment opportunities. The total payroll is estimated in $3.1 billion and the accumulated corporate income tax in $800 million. “The exportation activities promoted by Law 20 offer great potential for the local economy, because of the high degree of mobility of the service economy. The economic impact of Act 20 revenues could represent close to 1% of Puerto Rico’s Gross National Product,” added the economist.
On the other hand, the data related to Law 22 economic impact shows that most of the grantees are consultants, traders, entrepreneurs and investors, mainly from the financial industry. 89% reported having their previous residence in the United States and 11% in Venezuela, the United Kingdom, Spain and other countries.
The highest economic impact of Law 22 comes from investment in real estate, which amounts to almost $266 million in the local market, mostly in Dorado, Humacao, Río Grande and Condado. In Palmas del Mar, Solarea Beach Resort, Palmas del Mar Yacht Club and the Harbour Lakes Development have become beautiful examples of what Puerto Rico offers to potential investors and to those interested in the Island’’, both as a business destination and as a simply awesome place to live. Baco Bagué said that approximately 115 decrees under Law 22 were issue by the EDCD for investors residing in Palmas del Mar and about 70 decrees attributed to investors covered by Law 20. These events have had a positive impact in the real estate market of Palmas del Mar.
“Activity associated to Law 22 companies has generated around 2,483 new jobs in the island. Total potential spending for all decree holders amounts to more than $73 million. It’s estimated that by 2024 there will be approximately 4,000 approved decrees, which could generate 11,945 new jobs. The value of real estate purchased is estimated in $1.7 billion, and the investors potential expenditures in over $830 million,” added Villamil.
The study concluded that laws 20 and 22 could further benefit the local economy if the derivative effects of both decrees are captured. These measures, combined with other efforts that help guarantee wider secondary effects, have enormous potential to promote economic development based on exportation. A more diversified, knowledge and services oriented economy is the ultimate goal. These numbers prove not only that is possible, but that it is already happening.
Of course, there is still work to do. Among the recommendations made to generate more economic growth with the help of both laws the study outlined the followings: Revise job creation and investment requirements (Laws 20 and 22); focus promotional efforts on incentivizing local firms to obtain these decrees; Redirect Law 20 to a broader framework for local start-ups development; Act 22 should be used to incentivize the arrival of foreign entrepreneurs dedicated to Law 20 eligible activities.
“The study shows that Laws 20 and 22 attract individuals and companies that help generate well remunerated jobs in diverse sectors. We are strengthening the foundation for a diverse, service oriented and export oriented economy. But it’s fundamental to measure the achievements of the incentive programs in order to identify opportunities to improve them throughout the journey to revitalize Puerto Rico’s economy. This is now more than an incentives program, it is a movement, a transformation. We like to think of it as a new economic era where we are putting Minds to Work. ” expressed the Secretary of Economic Development, Alberto Bacó Bagué when presenting the conclusions of this study.
Numbers are impressive, but it is even better to know what the ones that are already here have to say about Puerto Rico. “It (locating offices in Puerto Rico) has been a win-win move for PwC…in terms of growth and scalability is more cost effective than other jurisdictions.” said Gina Biondo from PwC, NY Office, in a presentation for potential investors held in New York City in March. “After deep analysis, we concluded that Puerto Rico is the single best place in Earth to do insurance business”, said in that same event Walter Keenan, CEO of Advantage Insurance Holdings Ltd. They are thus joining Michael Tenenbaum, John Paulson, Nicholas Prouty, Marc Jacobs, and many others savvy investors who have seen what Puerto Rico has to offer, which is a lot more than beautiful beaches or an all year long warm tropical weather.
What is now clear for the economic development team is that the strategy is working, that it is restarting our economic activity and that there are yet better things to come. There are things to do on the fiscal side, but Puerto Rico has the tools to foster economic development now, with the collaboration of the private sector and continuing efforts to attract investors and residents. They are, without any doubt, part of the new economic transformation of this beautiful Island.