CPA Study Floats a Single Corporate Tax Rate Below the U.S. Level and a Rethink of the Sales Tax to Unlock Investment

Puerto Rico should consider replacing its patchwork of corporate tax rates, which run from 4% for companies with certain decrees to 37.5% for a regular corporation, with a single flat rate for all businesses set below the U.S. level and competitive with jurisdictions such as Ireland and Singapore, according to a study presented Tuesday by the Puerto Rico Society of Certified Public Accountants (CCPA) and its Foundation.

The 183-page study, “Structural X-ray of Puerto Rico’s Tax System and Its Main Economic Distortions,” prepared by the research firm ABEXUS and economist Edwin Ríos, also calls for exploring alternatives to the Sales and Use Tax (IVU, by its Spanish acronym), including a value-added tax or a broader base with a lower rate, and for rethinking the inventory tax, the municipal license tax and a property tax still based on 1957 values.

Its central argument is that the system now decides which investments are profitable, and that it penalizes the local companies that sell goods and services on the island.

The study suggests a clear order of priorities for business: tax profits at one rate, stop taxing inputs and inventory, and judge every incentive by the new investment it brings in.

“We want to contribute a base of data and evidence that makes it possible to evaluate reform alternatives by their effects on investment, productivity and equity, in addition to their impact on collections,” said CPA Rolando López, president of the Foundation.

The authors stress that the study is a diagnosis and not a reform bill. It does not estimate what its ideas would cost the Treasury.

A 33-point gap between favored and regular companies

The regular corporate rate can reach 37.5%, more than 10 points above the combined federal and state average of 25.5% in the United States, while entities with certain decrees pay 4%, the study found.

Tourism projects can also receive tax credits equal to 30% or 40% of eligible costs, along with partial exemptions from municipal taxes. When the difference is that large, the study says, the tax treatment decides which investment is profitable, and “the supermarket, the pharmacy and the corner store compete at a disadvantage,” as the CCPA put it.

The remedy the study puts on the table is to widen the base, limit special rates, incentives and decrees, and apply one flat rate to all businesses. As references, it cites Ireland’s 12.5% rate and Singapore’s 17%, which apply regardless of industry, with time-limited incentives for young companies.

That would not mean eliminating industry incentives, the authors write, but delivering them through other mechanisms such as cash grants or tax credits. The study adds a caveat: under the OECD’s global minimum tax, large multinational groups face an effective floor of 15%.

The study also flags abrupt jumps in the rules. In one corporate example, moving from $100,000 to $100,001 in gross income can raise the tax bill from about $6,000 to $10,000, so that one more dollar of income costs about $4,000 in tax.

It found 152 tax changes between 1994 and 2025, 98 of them since 2011, or about six a year, which raises compliance costs and makes long-term planning harder, particularly for small and midsize companies.

Concentration compounds the risk. Of 52,330 taxable corporations in 2021, just 70, about 0.1%, reported gross income above $50 million and accounted for 41.5% of corporate tax liability, while the 93.2% with gross income of up to $1 million accounted for 14.5%.

A sales tax that also taxes production

The second finding with direct business consequences concerns the IVU. In theory a consumption tax falls on the final buyer, but the study estimates that $1.72 billion of the $4.04 billion collected in 2025, or 42.7%, came from purchases companies make to operate.

Businesses cannot recover that tax, so it accumulates at each stage of the supply chain and raises the cost of producing in Puerto Rico.

In plain terms, this is tax pyramiding: a tax paid on an input becomes part of the price on which the next tax is charged.

The study’s index of accumulated taxation is 1.74, meaning that for each dollar of IVU on final consumption there is another 74 cents tied to business purchases. If most of that cost is passed on, the real burden on consumers could approach 12.7%, against the 11.5% printed on the receipt. What is not passed on is absorbed in lower margins, wages or investment.

Two details in the full study temper the 42.7% headline. First, the share is close to the U.S. state average of 41.7%, so the business share is not unusual. What stands out is the rate, at 11.5% the highest under the U.S. flag, applied to a narrow base; the study estimates that 62.7% of personal consumption spending is excluded or exempt.

Second, the figure is a residual estimate, not a transaction-by-transaction measurement, and the authors ask the government to publish better data. Their recommendation is that any widening of the base be accompanied by a cut in the general rate.

Taxes that are due whether or not a business earns

At the municipal level, the study singles out two levies that do not depend on profit. “The municipal license tax is charged on sales, whether the business makes money or not, and the inventory tax on stored merchandise, whether it is sold or not,” López said.

“Both weigh proportionally more on small and low-margin businesses, and the inventory tax leads companies to keep less merchandise than is prudent, which leaves the island more vulnerable,” he added.

Inventory accounted for about 56.5%, or more than $300 million, of the roughly $548 million billed in personal property tax in 2025, the study found. Because free-trade zones and decrees reduce that burden for some companies, smaller businesses end up the most exposed.

The study suggests giving municipalities more autonomy over the tax and offers one option: taxing the average cost of goods sold at a reduced rate of 0.5% to 1%, with no exemption.

Real property is still assessed with values derived from 1957 prices and costs, so comparable buildings can carry very different bills. Less than a third of property value ends up fully taxed, and the property tax generates 8% of state and municipal revenue in Puerto Rico, compared with an average of 29% in the states.

The study recommends moving to current values that are updated periodically.

Shrinking base with no growth to spare

The study’s findings on households explain why the base is fragile. Only about three in 10 people aged 15 or older owe income tax. The top 33% rate applies from net income of $61,500, a low threshold by U.S. standards that the study says can weigh on mobile professionals deciding whether to stay.

Effective rates quadruple between $30,000 and $100,000 of income, from 2.9% to 12.6%, then flatten at 19% to 20% above $200,000. Inflation has eroded fixed amounts; the $2,500 deduction per dependent would be $3,762 today if it had been indexed.

Demographics also add pressure. If current trends continue, the study projects about 213,000 fewer jobs by 2045 and about $843 million a year less in combined income tax and IVU collections, in 2025 dollars. The authors describe these as conditional scenarios, not forecasts.

That projection comes at a time when the economy is structurally sluggish. As CB reported Nov. 4, economists told the Financial Oversight and Management Board that growth is effectively stalled, with forecasts for fiscal 2027 ranging from a 1.4% contraction in real GNP, projected by Estudios Técnicos, to 0.3% growth in real GDP, projected by Moody’s Analytics.

V2A Consulting finds payroll employment largely flat since 2024, and nearly one-third of Puerto Ricans who were young adults in 2010 now live on the U.S. mainland. Worker shortages are already the main obstacle to turning about $1.6 billion in announced manufacturing investment into production.

“A reform must facilitate work and investment, and strengthen the base that sustains public services,” said CPA Gerardo Torres, president of the CCPA.

The study concludes that changing taxes one at a time can widen the differences and concentrate the burden further, and that any reform should include a transition period.

The hard part is what the study leaves open. A single corporate rate helps the retailer paying 37.5% but raises the bill for companies now paying 4% under decrees that are contracts, and those companies include the manufacturers and hotels driving what growth the island has.

Any change that costs revenue must also satisfy the Oversight Board’s requirement that tax measures be offset, the test it applied to the tax-relief measures debated this year, and the study offers no cost estimates because, the authors say, the detailed data needed for those simulations are not public.

What it does supply is a clear order of priorities for business: tax profits at one rate, stop taxing inputs and inventory, and judge every incentive by the new investment it brings in.