Puerto Rico has been putting a full-court press on Hollywood in recent years, marketing itself as sexier, more economical alternative to popular a runaway production destinations such as Louisiana and North Carolina. But while its 40% tax credit was good enough to attract Hollywood projects such as “The Losers,” “Fast Five” and Johnny Depp starrer “The Rum Diary,” it lost some of its allure when producers saw the fine print: the credit applied only to money paid to Puerto Rico residents, including local crew members, hotels and equipment vendors.

“They realized that in order to attract production, they needed to be flexible on the labor front,” says Joseph Chianese, VP of business development and production incentives planning for Entertainment Partners.

In March 2011, Puerto Rico Gov. Luis G. Fortuno signed a law that added a 20% credit for non-resident acting talent (including stand-ins), increased the program’s annual cap from $15 million to $50 million, reduced the minimum in-state spend from $1 million to $100,000 and eliminated the requirement that 50% of principal photography be done in Puerto Rico.

Last July, the pot was sweetened yet again when the 20% credit was expanded to include all above-the-line talent, including writers, directors and producers — an important selling point as the territory vies to host the next “Pirates of the Caribbean” sequel.

The 20% credit is funded through an accounting procedure made possible by Puerto Rico’s unique status as a U.S. protectorate. If an actor is paid $10 million, it generates $2 million in tax credits. At the same time, that actor has a withholding tax of $2 million, so the credit is self-funding, allowing it to be uncapped.

“One might think that would be a problem because an actor would say to the production, ‘You have to pay me the 20% that Puerto Rico is taking,’ ” says Carlos Amy, who took over as Puerto Rico’s film commissioner after Mariella Perez Serrano was ousted last month. “But we are treated as a foreign tax jurisdiction, which allows above-the-line talent to claim that tax at the federal level and have it returned to them in the form of a credit, dollar for dollar.”

Recently, Puerto Rico has been facing competition from its Caribbean neighbor the Dominican Republic, which in 2010 enacted a 25% transferable tax credit for all local above- and below-the-line production costs. Although the Dominican Republic is struggling to correct a reputation for corruption and instability, it will soon have something Puerto Rico doesn’t: a major soundstage facility, the $50 million Pinewood Indomina Studios, which is still under construction.

“The government is aggressively pursuing a studio project,” says Amy, adding that even with a lack of professional soundstages until now, numerous major productions have managed to do all their stage work in Puerto Rico’s warehouses.

Historically, Puerto Rico’s primary competitor has been Hawaii, which offers a similar tropical mix of jungle and beach locations. Hawaii has a less-generous 15%-20% tax credit, but it stays in the game due to a long history of production, significant infrastructure and the fact that it’s a U.S. state where English, not Spanish, is the primary language.

Amy is quick to counter that Puerto Rico is a U.S. territory, with all the attendant perks and privileges.

“When you come here, you don’t need a visa, you don’t need to worry about exchanging currency or the applicability of some strange jurisdictions’ labor and safety rules, because the same rules that apply in every other state apply here,” Amy points out.

However, like its Caribbean neighbors and some of the popular runaway production spots in the Southeastern states — especially Louisiana, Florida and North Carolina — Puerto Rico does have to worry about hurricanes. Although it hasn’t suffered a serious hit in 10 years, securing insurance during hurricane season (June 1-Nov. 30) is still quite expensive, so Puerto Rico offers to pay for coverage.

“For some of the smaller films, the insurance component is so onerous that if we didn’t offer (it), it would be tough for them to come down here,” Amy says. “So it’s one more arrow in our quiver.”

Scout & About: Puerto Rico 2012
Tax break stakes’ giant leap | Exotic, but still part of the USA | Film firms, financiers funnel funds for features