Puerto Rico: Tax legislative changes

Puerto Rico: Tax legislative changes

New tax legislative provisions have been enacted in Puerto Rico.

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Act No. 238-2014 was enacted by the legislative assembly on December 22, 2014, amending various provisions of the Puerto Rico Internal Revenue Code of 2011 (as amended) and affecting prior legislative amendments enacted pursuant to Act No. 77-2014 and Act No. 80-2014.

The following discussion looks at certain amendments made by the recent legislation to the tax law of Puerto Rico.

Income tax

Capital gain and losses

For tax years beginning after December 31, 2012, the period for claiming capital losses has been reduced to seven years, from 10 years.

The holding period used to determine the classification of gain or loss from a capital asset as long term or short term is also modified.

  • If the sale or exchange occurred before June 30, 2014, a determination of whether the gain or loss is “short term” is based on a holding period of six months.
  • If the sale or exchange occurred after June 30, 2014, the gain or loss will be considered “long term” if the holding period is more than one year.

Deemed dividend

The term “foreign owner” under section 1062.13 of the Puerto Rico tax code, for purposes of the “deemed dividend tax” has been expanded to include:

  • Nonresident individuals, estates, and trusts
  • Entities that are not taxed as corporations and are not engaged in business in Puerto Rico
  • Entities taxed as corporations that generate less than 80% of their gross income for the three prior years derived from Puerto Rico sources or effectively connected with Puerto Rico.

It has been further clarified that the deemed dividend tax will be excluded from the computation of the estimated tax.

Any deemed dividend tax paid can be used as a credit against future withholding tax liabilities of the shareholder, whether or not a foreign owner at the time an actual dividend is distributed, until exhausted. Any unused deemed dividend tax can be refunded by means of an agreement with the Puerto Rico Secretary of the Treasury.

Increase in certain passive income tax rates

The withholding income tax rate is increased to 15%, from 10%, on the following payments:

  • Dividend payments to nonresident individuals
  • Payments to nonresident U.S. citizens for the acquisition of real property or stock
  • Dividend payments made to individual taxpayers who are shareholders of a domestic corporation, or foreign corporation deriving income effectively connected with the conduct of a trade or business in Puerto Rico of at least 80% for the last three tax years

This new rate applies for payments made after October 31, 2014.

Alternate basic tax for individuals

The calculation of the “alternate basic tax” for individuals will consider the “additional tax on gross income” of certain taxpayers—i.e., distributions to partners, members, and shareholders from an entity treated as a flow-through entity for tax purposes.

Additional tax on gross income

The “additional tax on gross income” will not apply:

  • For tax years beginning after December 31, 2014, for corporations
  • For tax years beginning after January 1, 2014, for partnerships, special partnerships, and associations of individuals

The additional tax can be claimed as a deduction against net income subject to “normal” tax, which then would be credited against estimated tax payments.

Taxpayers are not to include in their gross income, the amount of their distributions from pass-through entities in the additional tax calculation.

A “supplemental return” must be filed by pass-through entities with tax years beginning after January 1, 2013, and ending on or before November 30, 2014, to report the computation of the additional tax. The supplemental return must be filed on or before January 31, 2015, if the pass-through entity filed its information returns (forms 480.1(S), 480.1(E), 480.2(I))—which are equivalent to the U.S. federal partnership return—on or before December 31, 2014.

On the other hand, if the information return has not been filed, the supplemental return must be filed as an additional schedule to the partnership information return. The “additional income tax on gross income” must be paid as of the filing date of the supplemental return.

Prepayment for IRAs

The tax “prepayment” period has been extended to January 31, 2015, for individuals with individual retirement accounts (IRAs). This extension was approved because guidance issued by the Puerto Rico Treasury to remit the prepayment was released on August 6, 2014, to limit the original prepayment period.

Qualified individuals still have an opportunity to make a prepayment at the special tax rate of 8% on the total amount―or the partial increase in the accumulated value of the undistributed amount―of their IRA.

Furthermore, the penalty on distributions for early retirement before the individual reaches age 60 years has been reduced from 30% to 15%. The 15% penalty will apply to distributions previously prepaid at the special tax rate of 8%. The special tax rate of 8% does not apply to distributions made to IRAs for the tax year 2014.

Prepayment on the increase in the accumulated value of capital assets

The prepayment period under the special tax, imposed at a rate of 8%, on an increase in the accumulated value of certain assets held by individuals, estates or trusts has been extended to January 31, 2015.

Act No. 238 also extended the prepayment period to the following:

  • The accrued and undistributed value of the assets under a qualified employee trust
  • The amounts paid or distributed to a beneficiary or participant under a qualified employee trust on the participant’s separation or termination from the plan

Furthermore, the prepayment period under the special tax rate of 15% has also been extended to January 31, 2015, for “eligible assets”—i.e., taxable income treated as ordinary income under the Puerto Rico tax law, and distributions from a nonqualified employee trust.

Participants of employee trusts and individuals may prepay these amounts with the accumulated and undistributed balance of the plans. The distribution amount used to prepay the tax would not be subject to any penalty for early retirement. In addition, corporate taxpayers can use the extended prepayment period for the special tax on increases in accrued value of long term capital assets.

Prepayment on the increase in the accumulated value of the capital gains

The prepayment period under the special tax of 8% on the total or partial increase in the accumulated value of certain capital assets possessed by corporations has been extended to January 31, 2015.

Sale and use tax

foreign trade zones

The tax code previously imposed a “use” (import) tax on the introduction of goods into Puerto Rico, with that tax also applying to property introduced into a foreign trade zone (FTZ) located in Puerto Rico.

With the legislative amendment, property will be considered “introduced” into a FTZ (and, thus, subject to tax) when the taxable property loses its FTZ status or is considered introduced by the U.S. customs office of Puerto Rico.

The FTZ status must be evidenced by filing Form 214, Application for Foreign Trade Zone Admission and/or Status Designation.

Use tax on taxable items

Taxable property previously subject to the use (import) tax upon importation will not be subject to the use tax for its “use, storage or consumption” by the same person. However, such property could be subject to sales tax after introduction into Puerto Rico upon sale.

Use tax on the storage for taxable items

Following the same principle, any person or entity that manufactures, processes or assembles taxable property is not subject to the use tax for the “storage, custody, retention or withdrawal of such property” from the warehouse. However, such taxable property may be subject to sales tax in a future sale transaction.

Sourcing of the sales and use tax - municipal purposes

For municipal sales and use tax purposes the sourcing of services income will be determined by reference to the location of the facility from which the services are invoiced. However, telecommunications, cable TV, and satellite income will be sourced based on the client’s billing address.

Excise tax

taxes on wine

An amendment was made to the “wine” definition, to exclude the following type of wines: (1) sub-standard wine, (2) concentrated must wine, and (3) tropical fruit wine.

Also, a production cap has been included in the wine definition, as a requirement to be categorized as sub-standard or tropical fruit wine. In general, this new production cap establishes that the production for the previous year must be lower than 400,000 gallons taking into account the combined wine and distilled spirits production (within and outside of Puerto Rico) of the wine manufacturer and its related persons. If the wine does not meet the production cap or is considered one of the wines excluded from the wine definition, it is subject to a higher rate of tax.

Distilled spirits tax

A distilled spirit used in whole or in part in the production of alcoholic beverages, and stored in an authorized bonded warehouse by the Treasury Secretary, within or outside of Puerto Rico, will continue to be subject to the tax on distilled spirits, imposed before the production of the alcoholic beverage. The tax paid on the alcoholic beverage expressly excluded all other ingredients, such as fruit juices, sodas, spices, and flavors used in the production of the beverage.

Other provisions

penalty for failure to withhold

Section 6041.01 of the Puerto Rico tax law has been amended concerning application of the penalty for a failure to withhold the deemed dividend tax (imposed under Act No. 1062.13). The penalty will be 2% for each 30 days (or fraction thereof) for which the tax remains unpaid, not to exceed 24%.

 

For more information, contact a KPMG tax professional in Puerto Rico:

Rolando Lopez | +1 (787) 756-6020 | rlopez@kpmg.com

Carlos Molina | +1 (787) 622-5311 | cmolina@kpmg.com

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