BIO’s Patrick Kelly, vp of state government relations, estimates the tax will raise approximately $6 billion from the biotech companies with major manufacturing operations on the island during the six years it is in force. “It’s a significant tax, and an unforeseen business expense.” It is particularly troubling because “it came out of the blue,” Kelly remarked to GEN.
“We have no idea where Puerto Rico stands regarding the industry. If this can be done, it doesn’t bode well,” he stressed. Once companies assess the situation, they may conclude that there are too many unknowns and that the business climate is too risky for continued investment in Puerto Rico.
One year ago Governor Luis Fortuño flew to New York in the wake of the Pfizer/Wyeth merger to attempt to mitigate the effects of that merger on local pharmaceutical jobs. One year later Law 154 passed, calling into question the future of what has been a mutually beneficial relationship between Puerto Rico and the biopharmaceutical industry. “This new tax will be overly burdensome for U.S. companies doing business in Puerto Rico, putting jobs at risk,” Lilly noted.
For Puerto Rico, the consequences could be severe. In a letter to the governor dated the day before the law was passed, John Murphy III, director of state government relations for BIO, wrote, “These proposed taxes…will not only ensure that Puerto Rico’s ability to attract new business investment will be constrained, but they will also lead to decreased innovation in the established Puerto Rico life sciences sector and possibly even the migration of high-quality and high-wage jobs out of the area.”
The U.S. Chamber of Commerce, writing its counterpart in Puerto Rico, stated, “A strong incentive is created for foreign companies to look elsewhere for their biomanufacturing and distribution. This new tax increase will profoundly affect the decision-making of foreign corporations as they consider whether to continue to do business and deploy their capital in Puerto Rico.
“An ad hoc tax passed without notice, after the start of the fiscal year, which takes effect in less than three months, will wreak havoc on the business and tax planning of companies in a time of increasing uncertainty in the global economy, creating a hostile tax environment in Puerto Rico. To say that this new tax increase is ill-timed is an understatement.”
PhRMA was similarly concerned, noting that Law 154 will dramatically hinder (biopharmaceutical) companies’ positive efforts within Puerto Rico and could significantly reduce the ability of PhRMA’s members to operate in the Commonwealth.
Lilly agreed. “This tax will likely affect our Puerto Rican operations.” Pfizer is more sanguine. Although it foresees a negative financial effect, the company said that there will be no impact to its 2012 financial target of an approximately 30% effective tax rate on adjusted income as a result of this change.
BIO’s Kelly told GEN, “The affect upon the industry may take several years to play out.” Companies may react, at least in the short run, by decreasing staffing or shifting some production volume to other facilities when practical. In the long term, it must cause corporations to reassess the relative risks and benefits of manufacturing in Puerto Rico. “Critical mass may leave the island,” Kelly speculated.