May 26, 2015 / 10:31 PM / 3 years ago

UPDATE 2-Puerto Rico tax bill set to become law after final House vote

(Adds details of Senate amendment in paragraph 7)

May 26 (Reuters) - Puerto Rico’s House of Representatives passed an amended tax bill on Tuesday to raise $1.2 billion through an increased sales tax, a measure needed to secure additional financing for the indebted U.S. territory.

The vote clears the way for the governor to sign the bill into law and allows Puerto Rico to pursue negotiations with hedge funds and other creditors over a bond deal of up to $2.95 billion. Finance officials have said the island could run out of money by the end of September without financing.

The key component of the new tax law is an increase in the local sales tax to 11.5 percent from its current 7 percent. It comes after weeks of wrangling sparked when House lawmakers defeated a bill to create a 16 percent value added tax.

House Speaker Jaime Perelló said the bill was needed as “a matter of such urgency, to address the fiscal situation and begin work on the commonwealth’s budget process.”

Lawmakers are debating a $9.8 billion budget, which is due at the start of the fiscal year on July 1. The budget proposes cuts of $674 million for the coming year.

Officials have said they will seek short-term financing needed to avoid a government shutdown once the budget is passed. Puerto Rico has typically used revenue anticipation notes (TRANs) financed by bank lenders.

Tuesday was the second time the House voted on the bill after the Senate removed a provision, inserted by the House, that would have applied the sales tax to certain processed food. Perelló said the process had been “long and tedious.”

Puerto Rico is struggling to turn around its economy. With $72 billion in total debt, it has been in or near recession for almost a decade and its population is shrinking because of migration to the U.S. mainland.

Puerto Rico’s debt has rallied since House lawmakers first agreed on the tax measure on May 14. General obligation bonds with 8 percent coupon, a $3.5 billion issue bought heavily by hedge funds last year, have rallied 6.1 percent since that date to 84 cents on the dollar on Tuesday.

The island is facing a payment of $655.2 million on its general obligation debt on July 1. (Reporting by a contributor in San Juan; Writing by Edward Krudy; Editing by Leslie Adler, Chris Reese and Steve Orlofsky)

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