US TAX REFORMS IMPACT PUERTO RICO EXPORT SECTOR

As pressure grows for comprehensive reform of Puerto Rico's public finances, local reports have highlighted possible lost revenue as U.S. tax measures attract drug firms' capital back home. The self-governing territory is expected to be hard hit this year by the American Jobs Creation Act, which allows U.S.-based firms to repatriate foreign profits at a 5.25% rate, as opposed to the standard 35% rate. Puerto Rico exports pharmaceuticals worth roughly US$40bn each year.

The island's government has attempted to eliminate this disparity, proposing the Puerto Rico Inclusion Bill, which would treat the territory as part of the U.S. for profit repatriation purposes. If Puerto Rico were included in the National Enterprise Zone Act, manufacturing zones could be entitled to a federal tax rate of 17%.

This aside, some reports suggest that Puerto Rico's pharmaceutical manufacturing base is headed for a decline beyond 2005. Pfizer, Merck, and Eli Lilly's downsizing plans are expected to impact some local production facilities, and a growing use of local contract manufacturers could force down the value of fixed investment by large drug companies in Puerto Rico. Meanwhile, the island faces the threat posed by rival, emerging global manufacturing locations.