Puerto Rico: Draft regulations for implementing VAT regime

VAT draft regulations in Puerto Rico

The Treasury Department of the Commonwealth of Puerto Rico on February 19, 2016, published draft regulations for a value added tax (VAT) system. Effective April 1, 2016, Puerto Rico will replace its sales and use tax (imposed at rates of 10.5% and 4%) with a new VAT to be imposed at a rate of 10.5%.

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Summary

The VAT draft regulations are largely based on the existing regulations for sales and use tax, and provide further explanations and examples for the definitions for VAT purposes set forth in Subtitle DD of the 2011 Internal Revenue Code of Puerto Rico. 

While the VAT draft regulations do not clarify the general sourcing rules for sales of goods and services, they provide detailed rules for the sourcing of telecommunication services. The VAT draft regulations:

  • Detail and explain different scenarios in which a transaction is taxable or exempt for purposes of VAT or sales and use tax, jointly, or separately
  • Define and discuss on an item-by-item basis the transactions that will be VAT-exempt
  • Provide details on the person responsible for VAT payment and VAT collection
  • Clarify the application of the accounting methods by type of business and the consequences on the remittance of VAT
  • Include extensive discussions concerning adjustments, credits, and refunds related to the payment of VAT and discuss processes, computations, timing and amounts to be taken either as an adjustment credit or refund, depending on each situation
  • Provide examples illustrating how the credit system works based on the provisions of the 2011 Code

What’s not included, future items expected

Puerto Rico’s Treasury did not provide details on the future invoicing process which would be crucial to obtain adjustments, credits, and refunds. Also, the draft regulations are silent with respect to the registration and various certificates described in Subtitle DD of the 2011 Code. 

Puerto Rico’s Treasury will also have to issue guidance with respect to the transition from the sales and use tax regime to the VAT system as well as publish draft VAT returns and guidance relating to their submission.

Comments and suggestions or questions regarding the VAT draft regulations may be sent to: ComentariosReglamentoIVA@hacienda.pr.gov. 

 

For more information on the new VAT regime in Puerto Rico, contact a KPMG tax professional:

Leah Durner | +1 (202) 533-5542 | ldurner@kpmg.com

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

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