This is how Firaxis designed it when they added this part of the mod to the core game. There are two problems with their approach:
The modifiers apply only to puppet states, not occupied, as you noticed.
The modifiers are global settings so we can't alter them during an active game. For example, we might want a policy to change the puppet penalties, but can't do this right now.
I've considered returning it to the mod-version of this so we have more control over how it works.
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