The Office of the Comptroller of Puerto Rico issued a qualified opinion on the fiscal operations of the Department of Economic Development and Commerce (DDEC). A qualified opinion is issued when the instances of non-compliance, individually or in the aggregate, are significant but not pervasive.
The Report reveals deficiencies in the oversight of businesses and investors with decrees under Acts 20 and 22 of 2012. These decrees established certain requirements and, in exchange, grant reduced income tax rates and exemptions from property taxes, among others.
From the examination of a sample of 10 of the 2,226 business decrees, it was identified that the Incentives Office of the DDEC did not require one of the businesses to create three direct jobs, did not require the sworn statement of the start date from another of the businesses, did not require annual tax reports from two businesses, nor did it require eight income tax returns from four shareholders of three businesses.
In addition, the Incentives Office did not require the annual reports from an investor, nor did it require evidence of a Statement for Individual of the Internal Revenue Services from five investors, nor did it request evidence from two investors of mandatory donations of at least $5,000 to nonprofit entities.
These situations make it impossible to validate compliance with the requirements of the decrees granted, nor do they allow the Department to have the necessary information for statistical purposes and economic studies.
The four-finding audit notes that after nine years without auditing compliance with the decrees, the DDEC formalized a contract on April 7, 2021, with a financial consulting firm to carry out the audit. With respect to the requirement of having an office or establishment located in Puerto Rico, the auditors did not locate the office of one of the businesses, could not validate the existence of another office that had been dissolved, and another business had a virtual office leased.
These situations make it impossible to detect errors, deficiencies, and irregularities in order to assign responsibilities and take corrective measures. In addition, the businesses may benefit from tax incentives without complying with the requirements of the decrees granted.
The report publishes that the acting secretaries of the DDEC did not prepare the annual reports from 2016 to 2019 that, by law, they must present to the Governor and the Legislative Assembly. In addition, as of July 23, 2020, the Department had not promulgated a regulation, circular letter, or administrative determination regulating the submission of the decree application, the imposition of penalties for non-compliance, and the oversight processes and preparation of compliance audits, among others. This absence of regulations may have left the Department without legal mechanisms to enforce the decrees granted.
The operational activities of the DDEC are financed from the general budget, special appropriations, own revenues or state and federal special funds. The audited financial statements reflected that the Department generated revenues of $1,279,260,303 and spent $1,218,857,652 with a surplus of $60,402,651.
This report of the Department of Economic Development and Commerce covers the period from July 1, 2016, to January 31, 2022. Audit Report OC-24-37 can be obtained on our website: www.ocpr.gov.pr.
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