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November 6, 2023

Puerto Rico's House of Representatives approves bill proposing minimum tax based on Pillar Two of the OECD/G20 BEPS 2.0 project

  • Puerto Rico's legislature is evaluating a bill that would allow entities to elect to pay an additional minimum tax.
  • While the bill contains elements of the Pillar Two rules, the new tax would not constitute a qualified domestic minimum top-up tax (QDMTT) under the Pillar Two rules.
  • The elective nature of the additional minimum tax could raise questions under US foreign tax credit rules for noncompulsory payments.

Puerto Rico's House of Representatives has approved a bill (HB 1908) that would amend the Puerto Rico Incentives Code to establish an additional 15% minimum tax for large multinational enterprise (MNE) groups operating in Puerto Rico. The tax is based on Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 project on addressing the tax challenges of the digitalization of the economy (commonly referred to as the BEPS 2.0 project).

Additional 15% minimum tax

The bill would apply to entities that have manufacturing tax decrees (Exempt entities) entitling them to certain incentives and that are part of an MNE group that would be in scope of Pillar Two (generally, groups with annual revenue of €750 million or more in at least two of the four preceding years). Generally, the bill would permit these entities to elect to pay an additional 15% minimum tax over the income taxes imposed on their net industrial development income by having their decrees amended or requesting new decrees.

The bill also would allow Exempt entities to elect specific tax years that would not be covered by the election to pay the additional 15% minimum tax. To choose the years to which the election would not apply, the Exempt entities would notify the Secretary of the Department of Economic Development and Commerce (DEDC) and the Treasury Secretary no later than the last day of the second month of the tax year for which the election would be made.

If an Exempt entity elects to be subject to the additional minimum tax, the entity would pay the excess of 15% of the global anti-base erosion (GloBE) income determined for the Exempt entity under the Pillar Two Model Rules over the income taxes imposed on its net industrial development income. The statute provides that GloBE income is determined by reference to the rules in Article 3.1.1 of the Pillar Two Model Rules. Alternatively, the Exempt entity could pay 15% of the GloBE income over the income taxes imposed on its net industrial development income, plus the amount of taxes imposed under a controlled foreign company (CFC) tax regime that are allocable to the Exempt entity.

Refundable tax credits

The bill would establish the following refundable tax credits for an Exempt entity that elects to pay the additional 15% minimum tax, provided certain conditions are met:

  • Refundable tax credit for substantial employment equal to 5.25% of the gross receipts of the members of the controlled group with operations in Puerto Rico
  • Refundable tax credit for a single manufacturing facility selling to members of the controlled group, with those sales representing 90% or more of its total gross receipts and a high concentration of risk equal to 7.5% of the gross receipts
  • Refundable tax credit for municipal impact (operating in one municipality solely) equal to 5.25% of the gross receipts

The bill would require the Exempt entity to claim the refundable tax credit on the income tax return for the tax year of the claim.

In addition, the bill would establish additional refundable tax credits equal to 5.25% of the Exempt entity's gross receipts, which would be reduced by the amount of the previously discussed refundable tax credits received or accrued by the Exempt entity for the same tax year. A 7.5% and a 12% additional refundable tax credit would apply to certain Exempt entities. The bill would require the additional refundable tax credit to be claimed on the income tax return for the tax year of the claim.

Exempt entities also could claim the following investment-based refundable tax credits, provided certain conditions are met:

  • Refundable tax credit for investment in research and development
  • Refundable tax credit for purchases of products manufactured (1) in Puerto Rico or (2) by an economically disadvantaged or critical industry supplier
  • Refundable tax credit for sustainable manufacturing
  • Refundable tax credit for the establishment of new businesses in Puerto Rico

The bill would authorize the Secretary of the DEDC to grant discretionary refundable tax credits. The bill would establish several factors the Secretary of the DEDC would take into account to determine the refundable tax credit amount.

Exempt entities could have the refundable tax credits refunded to them or use the refundable tax credits to reduce their income tax liability or pay any other tax obligation with the Puerto Rico Treasury Department or any other governmental agency. They also could assign, sell or transfer the refundable tax credits.

Application for decree amendment

The Incentives Director would share a copy of the application for a decree amendment with the Secretary of Treasury within five days of the filing date. When evaluating the application, the Treasury Secretary would verify the Exempt entity's shareholders or partners are in compliance with their tax obligations under the Puerto Rico Internal Revenue Code of 2011, as amended. If they are not in compliance, the Treasury Secretary would not approve the application.

The bill would require the Incentives Director to issue an eligibility report and recommendations on the application and submit a draft amendment of the decree to the Treasury Secretary. The Treasury Secretary would evaluate the draft amendment and issue a report within 10 days. If the report is favorable or the Incentives Office does not receive a report within 10 days, the bill would deem the draft amendment as receiving a favorable recommendation. The draft amendment would then go to the Secretary of the DEDC to make a final determination.

Effective date

If enacted, the bill would be effective for tax years beginning after December 31, 2023.


HB 1908 was presented in the Puerto Rico House of Representatives on October 24, 2023, and was approved by an ample margin of votes on October 31, 2023.

We expect a broader discussion to continue regarding how the bill fits within the framework of Pillar Two rules being adopted around the world. While the proposal references Pillar Two Model Rule Article 3.1.1 for purposes of computing GloBE income (as defined under the bill), it does not reference any other Model Rules that are relevant to the design of a QDMTT (e.g., none of the rules in Article 4, relating to Covered Taxes, are included). As a result, the top-up tax liability computed under the bill could vary significantly (both in a positive or negative direction) from the top-up tax that would be computed under another jurisdiction's income inclusion rule or UTPR that is based on the full Pillar Two Model Rules.

In addition, the bill allows for CFC regime taxes to be taken into account first, which is inconsistent with a QDMTT.

It is also unclear whether the refundable credits being offered, which in some cases are determined based on gross receipts, would meet the definition of a qualified refundable tax credit under the Pillar Two rules. Additionally, to the extent the new minimum tax is a foreign income tax that is potentially creditable for US foreign tax credit purposes, the elective nature of the tax could raise questions under US rules for noncompulsory payments, which would deny creditability.

It remains to be seen how the current version of the bill will evolve as it is evaluated by the Puerto Rican Senate and continues to move through the legislative process. Once HB 1908 is approved by the House and Senate, it would have to be signed by the Governor of Puerto Rico to become law. The Governor also has to contend with submitting the enacted law to the Financial Oversight and Management Board with a formal estimate of the impact, if any, that the law will have on expenditures and revenues, as well as a certification finding that the law is or is not significantly inconsistent with the applicable certified fiscal plan.

This current legislative session is scheduled to end on November 14, 2023. The House and Senate have until November 9th to approve bills. If the bill goes to a conference session, however, the conference version of the bill may not be approved until November 14th. The bill would require the issuance of regulations to implement some of the provisions, particularly those that relate to the refundable tax credits. One thing made clear in the statement of motives of HB 1908 is that legislation is needed to protect Puerto Rico's existing job base and ensure Puerto Rico continues to be a preferred place for investment and the creation of job opportunities.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Rosa M. Rodríguez (
   • Pablo Hymovitz Cardona (
Ernst & Young LLP (United States), International Tax and Transaction Services
   • Jason Yen, Washington, DC (

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor