Puerto Rico: Tax reform bill, VAT system introduced

Puerto Rico: Tax reform bill, VAT system introduced

A bill that would effectively repeal and replace the tax code in Puerto Rico has been introduced in the Commonwealth’s House of Representatives.

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House Bill 2329, the Tax System Transformation Act, was filed on February 11, 2015, and is comprehensive tax legislation that would effectively repeal the Puerto Rico Internal Revenue Code of 2011 (“2011 Code”) and purportedly replace it with a new Puerto Rico Internal Revenue Code of 2015 (“2015 Code”), to be generally effective for tax years beginning after December 31, 2015, but with certain provisions effective on or after April 1, 2015.

Overview

The 2015 Code, as proposed, is a “package proposal” with the purpose of essentially shifting from an income tax based system to consumption tax based system.

Among the most notable items, the proposal would:

  • Eliminate a significant number of exemptions, exclusions, and the preferential tax treatment of many items
  • Increase capital gain and dividend tax rates
  • Provide for significant reductions in the income tax rates for individuals and corporations
  • Substitute the current sales and use tax system (SUT) with a value added tax (VAT) regimeNew VAT system

New VAT system

The new VAT system would be effective for transactions occurring after December 31, 2015.

As a transitional measure, effective April 1, 2015, the current SUT rate would increase from 7% to 16%, and a credit mechanism for “eligible merchants” (as defined) would be created to mitigate the cascading effect in the cost of transactions along the supply chain during the transitional period.VAT imposition

VAT imposition

VAT at a rate of 16% would be imposed on imports and taxable sale transactions in Puerto Rico. The VAT would be payable on every stage of the supply chain as follows:

  • By the importer at the date of introduction of the taxable goods into Puerto Rico
  • By every reseller of taxable goods acquired from an importer or reseller
  • By the final customer in the acquisition of taxable goods
  • By the recipient of taxable services in Puerto Rico

The importer merchant and the merchant reseller generally would be entitled to claim a credit when the amount is paid and reported in the monthly VAT return or a when a fiscal voucher is issued by the merchant seller (as explained below).

Taxable transactions

VAT would be imposed on every taxable transaction. This includes the sale of goods, and the rendering of taxable services and bundle transactions, unless such transactions are exempt from the VAT.

The term “goods” would include prepaid cards, computer programs, and admission rights, and it specifically would exclude:

  • Cash, stocks, notes, membership interests, securities, insurance policies, bonds, mortgage loans, among others
  • Intangible property
  • Electricity
  • Water supplied by the Puerto Rico Aqueducts and Sewer Authority

Exemptions

The following goods and services would be treated as exempt from VAT:

  • Financial services, except services subject to bank charges
  • Prescription drugs
  • Equipment to assist persons with physical or physiological disabilities
  • The sale of goods or services provided by non-profit organizations
  • The sale of goods or services purchased by the federal or state government
  • Gasoline, diesel, aviation fuel, “gas oil,” crude oil and its derivatives
  • Hotel rooms subject to the room tax imposed by the Compañía de Turismo de Puerto Rico
  • Unprocessed food and food ingredients
  • Products acquired under the Nutrition Assistance Program (NAO) and the special supplemental nutrition program for women, infants, and children (WIC)
  • The sale and lease of residential property
  • The transfer of goods and services purchased by non-profit organizations
  • The sale and importation of medical and surgical equipment
  • The sale and importation of agricultural supplies
  • The sale and importation of automobiles, among others products subject to excise tax

Filings and payment due dates

Under the VAT system, every merchant would have to comply with the following:

Declaration on imports - Generally due along with the VAT payment before taking possession of the goods to be imported into Puerto Rico, unless an extension is granted by the Secretary of Treasury and/or the merchant is a bonded merchant.

Monthly return on imports - Due on or before the 10th day of the following month in which the goods are imported to Puerto Rico. The VAT payment would also be due on the 10th day of the following month, unless an extension is granted by the Secretary of Treasury, among other exceptions.

Monthly VAT return - Due on or before the 20th day of the following month in which the VAT is collected. The VAT payment will be also due on the 20th day.

Annual informative declaration for small business - Within 60 days after the filling of the corporate or partnership income tax return.

In general, those merchants operating under the accrual accounting method would have to remit the amount of VAT at the time any of the following events occurs first:

  • The issuance of an invoice
  • The receipt of payment from client, or
  • Thirty (30) days after the services are rendered or the goods are delivered

Responsible person for VAT collection and deposit

  • In the case of the introduction of goods into Puerto Rico - The person who introduces the goods to Puerto Rico
  • In the case of the sale of services and taxable goods or transfer of goods in Puerto Rico - The withholding agent (seller)
  • In the case of the services rendered by a non-resident person to a Puerto Rico resident person - The person who receives the service in Puerto Rico

For merchants having an agreement with a third party for the collection and deposit of the VAT to the Puerto Rico Treasury Department, the responsible person would still be the merchant that reports the income from the sales transactions in its accounting books.

Credits and refunds

Every merchant would be entitled to claim a VAT credit, which would be the sum of the following items:

  • The VAT paid by the importer at the time of introduction of the goods into Puerto Rico, and
  • The VAT paid by the merchant (not the final costumer) in the acquisition of goods and services, as reflected in the “fiscal voucher” that is related to the sale of such goods or the rendering of taxable services, and
  • The VAT paid by a merchant for a services rendered by a non-resident

The credit or refund could be claimed when paid with the filing of the monthly VAT return as reflected in the “fiscal voucher” (Comprobante Fiscal). Any unused credit amount would then be carried forward until exhausted.

Fiscal voucher (Comprobante Fiscal)

A “fiscal voucher” would be requested by every merchant purchaser or customer to the merchant seller who collects and deposits the VAT, within 30 days after the sales transaction.

The merchant seller generally would be required to issue the fiscal voucher to the merchant purchaser or customer within 30 days after the request date. However, the merchant seller would not have the responsibility to issue a fiscal voucher for the following transactions:

  • On any sale of goods and services that are exempt or subject to a 0% rate or sold to a “small merchant” (defined as having gross sales of $75,000 or less)
  • On any retail sale
  • When the merchant purchaser uses the accrual accounting method and owes the VAT to the merchant seller

Credit notes and debit notes

A credit note would be issued by any merchant seller who has the duty to issue a fiscal voucher to a merchant purchaser or customer, when there is an increase in the original sales price.

On the other hand, a debit note would be issued when there is a decrease in the original sales price.

The credit note or debit note must be requested within 30 days after the merchant purchaser has knowledge of the adjustment. The merchant seller then must submit the credit or debit note within 30 days after the request date.

Refunds

Any VAT refund may be requested to the Puerto Rico Treasury Department when the merchant complies with the following requirements: The VAT overpayment exceeds $10,000, and either (1) the merchant has an “eligible merchant” certificate, or (2) the merchant shows a VAT overpayment for three consecutive months in the monthly VAT return.

The Secretary of Treasury would then be required to issue an administrative determination authorizing the VAT refund, which would be requested by the merchant. If these requirements are not met, the VAT overpayment would then be credited in the monthly VAT return until exhausted.

Refund on retail sales

Every customer may request a VAT refund from the merchant seller for any decrease in the sales price, or if articles are returned to the merchant seller. To claim the VAT refund, the customer would submit to the merchant seller a fiscal voucher as evidence of the payment made with the original sales transaction. Otherwise, the VAT would not be refunded to the customer.

VAT reimbursement for eligible consumer

As a measure to mitigate the regressivity of the broad-base VAT, the bill provides that certain individuals designated as “eligible consumers” would be entitled to receive from the Puerto Rico Treasury Department an amount of money as VAT relief.

In general, an eligible consumer would be defined as any person meeting any of the following:

  • Any qualified single or married individual entitled to receive a reimbursement based on the determination or guidance to be issued by the Secretary of Treasury
  • Any person purchasing goods under any WIC or PAN program
  • Any person receiving pension payments by the U.S. or Puerto Rico government, as established in guidelines to be issued by the Puerto Rico Treasury Department

Additional requirements, as well as the amount of the VAT relief, would be established by the Secretary of Treasury. The relief amount would be payable on the last day of the following months: November, March, and July.

 

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

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

Carlos Molina | +1 (787) 622-531 | cmolina@kpmg.com

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