GAO Report: Tax Incentives Luring Wealthy Americans to Puerto Rico
San Juan, Puerto Rico – A critical examination of Puerto Rico’s long-standing tax incentives is underway, prompted by a recently released report from the U.S. Government Accountability Office (GAO). The report, finalized in late December 2024, reveals significant concerns regarding the oversight of these incentives, which have drawn thousands of affluent Americans to the U.S. territory over the past decade and raise questions about potential tax evasion and the effectiveness of the program in supporting the island’s economy. The GAO’s findings pinpoint a lack of robust compliance measures and insufficient data collection, potentially amounting to hundreds of millions of dollars annually in foregone federal tax revenue.
The investigation, initiated in July 2023 by the Democratic staff of the U.S. House Natural Resources Committee, centers on the administration of two key incentive programs: Act 20, the Export Services Act, and Act 22, the Individual Investor Act. These programs, established in 2012 by former Governor Luis Fortuño, were designed to stimulate economic growth by offering substantial tax breaks to individuals and businesses relocating to Puerto Rico. Currently, the island’s economy faces challenges with a more than 40% poverty rate, despite the implementation of these incentives. The incentives are available to those who originate outside of Puerto Rico and meet specific criteria, including residency requirements and financial commitments. Act 20 offers a 4% corporate tax rate and a 100% exemption on dividends or profit distributions, while Act 22 provides 100% exemption on dividends, interest, and long-term capital gains to wealthy individuals relocating to the territory.
The GAO’s report highlighted several critical deficiencies in the oversight process. For extended periods, the Internal Revenue Service (IRS) failed to obtain complete Social Security numbers for individuals claiming the incentive programs, hindering its ability to verify compliance and ensure that recipients were meeting the territory’s residency requirements. Furthermore, the IRS reportedly neglected to actively pursue updated data from Puerto Rico to maintain accurate records and track potential non-compliance. The GAO documented a specific instance in August 2023 where Puerto Rican officials shared an audit identifying 179 taxpayers who hadn’t provided evidence demonstrating they met the required residency criteria. The GAO noted that an IRS official reviewed a few cases before determining that no prioritization was required for the referrals. This lack of proactive monitoring contributed to a substantial gap in understanding the true economic impact of the incentives. As of 2024, a Democratic staff investigation of the Senate Finance Committee has further illuminated these oversight shortcomings, expanding the scrutiny of the programs.
The GAO’s investigation coincided with a significant shift in the IRS’s approach, led by Commissioner Doug Irvin, who initiated talks with Puerto Rico’s Treasury Department to agree upon an annual request for data. This effort aimed to bridge the communication gap that had previously plagued the relationship. However, the GAO’s review exposed a troubling fact: Puerto Rico’s economy has experienced little to no growth since the inception of these incentives in 2012. While studies, including a 2019 assessment commissioned by Puerto Rico’s Department of Economic Development and Commerce, indicated that the incentives generated over $2.5 billion in investments and created more than 36,200 jobs, translating to approximately 22,000 direct employment positions, by 2024, the actual economic impact remained questionable. A 2022 study estimated that individuals receiving the incentives had established more than 1,000 businesses and paid over $200 million in taxes and donations to the government, while the incentives themselves cost the government $184 million.
Furthermore, the GAO estimates that from 2020 to 2026, Puerto Rico will have foregone an estimated $4.4 billion due to individual investor incentives and $1.8 billion due to export service business incentives. The GAO’s report concludes that without addressing these oversight issues and improving data collection, the long-term sustainability of these tax incentives remains uncertain. The agency emphasized that while two major hurricanes, a series of earthquakes, and the COVID-19 pandemic have impacted economic indicators, the underlying issues related to compliance and accountability have consistently weakened the benefits of the incentives. Recent efforts to tighten compliance and reporting requirements, including doubling the mandated annual individual donation to nonprofit organizations to $10,000, represent a step in the right direction, but significant challenges remain. The debate surrounding these incentives highlights a complex tension between attracting investment and ensuring responsible economic development within Puerto Rico.
