Researchers and Small-scale Entrepreneurship

For decades, the Commonwealth of Puerto Rico relied on tax incentives to promote itself as a manufacturing hub for pharmaceutical and medical devices. These tax policies, coupled with a well-trained work force, turned Puerto Rico into one of the most vibrant manufacturing centers in the world. More than 40 companies operating in Puerto Rico created over 26,000 direct jobs and contributed another 50,000 indirect employments. Many of the top-selling prescription drugs in the market are manufactured in Puerto Rico. Lipitor, Viagra, Zocor, Zoloft, and many of the well-known blockbuster drugs came from the Island. As it encountered the tensions of the 21st Century, Puerto Rico realized that manufacturing alone cannot secure future economic success. Competition from the world’s emerging economy in Asia and Latin America was becoming stronger every day. China and India are capable of producing drugs with the same level of proficiency and at lower costs. Further, the pipeline for big blockbuster drugs is rapidly drying down. To maintain its role in the global health market, Puerto Rico realized that it must use its trained people not only to manufacture, but to research, design, develop and test products. Through clinical trials for emerging medicines, complex cell analysis and clinical diagnostic projects, Puerto Rico planned to play a role in creating the next generation of scientific discoveries; that it must move into the value line of its industrial base from manufacturing to drug development and testing. From the 1970’s on, in positioning itself as manufacturing hub, Puerto Rico relied on the fiscal autonomy that its current political status grants to the Island, and aggressively exempted from income and other taxes the profits that the pharmaceutical and medical devices companies generate in Puerto Rico. As the Island seeks to emigrate from manufacturing to research and development, the tax issues are different. Simply said, income tax incentives are not relevant for research centers, since research centers are cost centers, not profit centers. Puerto Rico then turned to a new experiment in tax policy: tax exemptions for the personal income of highly competitive researchers living and working in the Island. Thus, Puerto Rico moved to attract and retain in Puerto Rico competitive researchers and to create incentives for non-competitive scientists already living in Puerto Rico to move into more competitive projects. This article will explain the process, and the tax measures adopted by the Commonwealth Puerto Rico towards that end, and explore the potential developments in such policies as they are implemented in the years ahead.