UPDATE 2-Puerto Rico to reform taxes, shore up highway authority

Puerto Rico will begin overhauling its tax system and financially shoring up its highways and transportation authority in coming months, territory officials said on Thursday, as the commonwealth fights to gain budget stability.

The tax reforms are intended to reduce the marginal income tax rate, repeal the gross profit tax enacted in 2013, and shift toward consumption taxes, representatives of Puerto Rico's Treasury and Government Development Bank said during a webcast.

The officials said the reforms will "materially increase" general fund revenue and would likely pass the commonwealth's legislature during the first quarter of 2015.

Under the reforms, which were designed in consultation with KPMG at a cost of $4.7 million, Puerto Rico would replace its 7 percent sales tax with a broad-based goods and services tax. That will evolve into a value-added tax levied at each level of the distribution chain, said GDB President Melba Acosta-Febo.

Acosta emphasized the reforms will ensure the protection of the Sales Tax Financing Authority (COFINA in Spanish) revenue and pledges that back some $16 billion of outstanding COFINA bonds. She added COFINA would remain an "important source of financing."

The new system would eliminate income taxes on individuals earning less than $60,000.

The overhaul will "reform, cap or substitute" revenue from the Act 154 excise tax levied on multinational manufacturers operating in Puerto Rico, Acosta said. Puerto Rico officials met with U.S. Treasury officials this week about making permanent a provisional ruling that U.S. manufacturers can credit the tax against their federal tax burden, she told Reuters.

At the same time, the GDB filed a bill with the legislature on Thursday to raise the oil tax and move some of the finances of the troubled highways and transportation authority to the Puerto Rico Infrastructure Financing Authority (PRIFA).

The legislation would boost the excise tax charged on crude oil by $6.25 per barrel to $15.50 per barrel, starting in March, which would generate an additional $178 million in revenue per year, the GDB said.

Meanwhile, it would give increased funding to PRIFA so it can assume or refinance certain highway and transportation debts and include an optional authorization of up to $2.9 billion in PRIFA bonds, according to the GDB.

More than a fifth of the loans made by the GDB have gone to the transportation authority, and the bill would allow PRIFA to refinance $2.2 billion of those loans as well as the transportation authority's 2013 bond anticipation notes.

The GDB expects to complete the inaugural transaction for the new infrastructure financing this quarter, depending on market conditions and the legislative process, Acosta said.

Still, the island's next bond deal will come from the Puerto Rico Aqueduct and Sewer Authority in early 2015, with the aim of raising enough money to fund several years of its $400-million capital works program, said GDB Chairman David Chafey.

The officials also said the island's electric power authority can make a January debt payment. (Reporting by Reuters in San Juan and Lisa Lambert in Washington; Editing by Chris Reese and Ken Wills)

UPDATE 2-Puerto Rico to reform taxes, shore up highway authority