(Adds context on the tax deal, details)
May 14 (Reuters) - Puerto Rico’s governing party reached a tentative agreement on new tax measures, officials said Thursday, potentially avoiding a government shutdown and paving the way for a bond deal that could raise as much as $2.95 billion.
Under the terms of the agreement, which must be formally voted on in the legislature, Puerto Rico will increase its existing sales tax to 11.5 percent from its current 7 percent, while moving to a value added tax (VAT) within a year, according to Governor Alejandro Garcia Padilla.
If ratified, the agreement would help remove a major uncertainty for the U.S. territory which is struggling with $72 billion in debt and a stagnating economy.
Puerto Rico’s budget plans have been is disarray after an earlier VAT proposal was defeated in the House of Representatives last month when six lawmakers from the governor’s Popular Democratic Party (PDP) refused to back it.
Padilla said the government would gain $1.2 billion in tax revenues under the new measures, less than the $1.5 billion projected under his original proposal to introduce 16 percent VAT.
“We will have to make adjustments on government spending, but they won’t have to be the $1.5 billion we talked about if nothing had been done,” Padilla said, adding the government would now need to cut about $500 million from the budget.
Puerto Rico has been largely dependent on hedge funds for its financing after traditional municipal bond investors baulked at the increased risks associated with its debt. Those funds have been advocating for tax reforms as a way to raise revenues.
After the initial VAT proposal was defeated, a group of 34 hedge funds who hold about $4.5 billion of Puerto Rico’s debt said they planned to hire a litigation law firm to prepare for “all potential outcomes”.
The PDP reached agreement on the new proposal after a nine hour meeting. Governor Padilla said he expected the legislature to approve the deal within days, and that the increased sales tax will be implemented about a month afterwards. The package also includes a 4 percent tax on business-to-business services. (Reporting by a contributor in San Juan Writing by Edward Krudy; Editing by Miral Fahmy)