Our senior tax partner Fernando Goyco and our litigation partner Katarina Stipec successfully defended a constitutional attack to a grant of industrial tax exemption issued pursuant to the Puerto Rico Tax Incentives Act of 1998, as amended, Act No. 135 of December 2, 1997 (the “1998 Act”).
In Procter & Gamble Pharmaceuticals LLC v. Municipality of Manatí, 2012 TA 923, Procter & Gamble Pharmaceuticals, LLC (“P&G-PR”) challenged a municipal license tax deficiency in excess of $2 million notified by the Municipality of Manatí (the “Deficiency”). The Deficiency entailed several legal issues, the most significant of which was the Municipality’s allegation that P&G-PR’s grant of tax exemption approved by the Secretary of State pursuant to the 1998 Act breached section 13 of article IV of the Constitution of the Commonwealth of Puerto Rico. Such section provides as follows:
“The procedure for granting franchises, rights, privileges and concessions of a public or quasi-public nature shall be determined by law, but every concession of this kind to a person or private entity must be approved by the Governor or by the executive official whom he designates. Every franchise, right, privilege or concession of a public or quasipublic nature shall be subject to amendment, alteration or repeal as determined by law”.
The Municipality of Manatí (the “Municipality”) alleged that P&G-PR’s grant of tax exemption is a franchise, right, privilege or concession of a public or quasi-public nature that must be approved by the Governor of Puerto Rico (or the person designated by him) pursuant to such constitutional mandate. In support of its position, the Municipality made a historical analysis of all of the tax exemption laws of Puerto Rico dating back to 1917, to evidence that until the amendment of the Puerto Rico Industrial Tax Exemption Act of 1987, by Act No. 218 of October 27, 1995 all of the tax exemption grants were approved by the Governor of Puerto Rico allegedly because of the constitutional requirement. More importantly, the Municipality relied on obiter dicta in various cases of the Puerto Rico Supreme Court and comments by José Trías Monge, former Chief Justice of the Puerto Rico Supreme Court, as to the intent of the constitutional provision, that created uncertainty as to the validity of the tax grant.
A judgment in favor of the Municipality would have had catastrophic consequences for Puerto Rico’s tax exemption program, inasmuch as it would have triggered a challenge to all of the tax exemption grants issued under the 1998 Act and the Act of Economic Incentives for the Development of Puerto Rico, Act Number 73 of May 28, 2008. Our team brought this matter to the attention of the Puerto Rico Industrial Development Company and the Puerto Rico Manufacturers Association, and they filed amicus curie briefs with the Circuit Court of Appeals informing the court of the economic impact of the decision. Our brief in opposition to the appeal coupled with the amicus curie briefs, led the appeals court to affirm the judgment of the trial court. The Municipality filed a request for certiorari with the Puerto Rico Supreme Court that was vigorously opposed by us, and on November 19, 2012 the Supreme Court denied the issuance of the certiorari.