The Tax Advisor
Special Bulle n on Latest Tax News
June 2015
Alvarado Tax & Business
Zaragoza
& Alvarado LLP
Advisors LLC is a Limited
Liability Corporation organized
under the laws of Puerto Rico and
is engaged in providing tax and
business advisory services. We are
a multidisciplinary tax and business
advisory professional service firm
in Puerto Rico, unencumbered by
the constrain of association with an
auditing firm, and the regulatory
and disclosure rules of the Security
and Exchange Commission.
Act 72-2015: Puerto Rico’s Sales and
Use Tax Increases to 11.5% and
Transitions to a Value-Added Tax
By Denisse Galarza-Mora
After much debate and opposition, on May 29, 2015, the Governor of Puerto Rico signed
Act 72-2015 to, among other things, increase the current sales and use tax (“SUT”) rate
from 7% to 11.5%. With the approval of this Act, merchants and consumers will be subject
to a three-phase transition process toward a Value-Added Tax (“VAT”) system which is set
to begin on April 1st, 2016.
In this special bulletin we provide a summary of the main provisions of Act 72-2015 related
to consumption taxes. A separate bulletin will be issued to summarize the corporate,
income and excise tax changes included in the Act.
First Phase:
The three-phase transition process is set to begin on July 1st, 2015 with an increase in tax
rate and an increase in the percentage of the credit allowed to be claimed by resellers.
Continues on Page 2
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The current SUT of 7% will increase to
11.5%. The same includes a 1.5% municipal
SUT of which 1% is currently remitted to
the applicable Municipality and .5% that is
currently remitted to the Puerto Rico
Treasury Department (“Treasury”). With
the increase in rate, the municipal SUT will
remain unchanged. Merchants will continue
to remit 1% of the SUT to the applicable
Municipality but will remit the remaining
10.5% to Treasury instead of the current
6% of SUT.
The Certificate of Reseller and Exemption
of Municipal SUT will continue to be
available and the 1% municipal SUT will not
apply to those that hold a valid certificate.
Therefore, merchants that purchase or
introduce inventory items to Puerto Rico
will be subject to a 10.5% SUT (equivalent
to the amount paid to the Commonwealth).
Simultaneous to the increase in tax rate,
the credit limit for taxes paid by a reseller
on purchase of goods for resale will
increase from 75% to 100% of the tax
liability shown on the Monthly SUT Tax
Return. The increase in this credit limit
rule will allow merchants a faster recovery
of the SUT paid on the purchase or
introduction of inventory items to be sold
in Puerto Rico.
As you may recall, upon implementation of
the Puerto Rico SUT, all services rendered
by and provided to registered merchants,
were exempt from the tax. However, after
several amendments, the current law
provides for nine services to be taxable
when rendered between merchants (see
Table 1 below). During this first phase,
these nine taxable services will continue to
be taxed for SUT purposes, but the
applicable rate will also increase to 11.5%
(10.5% paid to the Commonwealth +1%
paid to the Municipality).
Second Phase:
The second phase of this transition
process is scheduled to begin on October
1st, 2015. Beginning on this date, all service
transactions between businesses, not
currently taxed today, will be taxable at a
rate of 4% commonwealth SUT. No
municipal SUT will apply to these services.
This new rate will not apply to taxable
services included on Table 1, since these
will continue to be taxed at the rate of
11.5% (10.5% + 1%).
The following seven services will remain
excluded from SUT:
1.
2.
3.
4.
5.
6.
7.
Services provided by the Government
of Puerto Rico.
Education services, including tuition
costs.
Interest.
Insurance commissions and services.
Health or hospital medical services.
Services rendered by persons whose
annual volume of business does not
exceed fifty thousand dollars
($50,000).
Services rendered to a related entity
that operates within Puerto Rico.
The rate of 4% will apply to services such
as professional, legal, accounting and
consulting services. It will also be
applicable to services received from
outside of Puerto Rico. In addition,
pursuant to the amendments, the 4% will
apply to the services provided by
employment placement agencies. Please
note that, unlike the SUT paid on
inventory purchases, merchants will not be
allowed a credit for the SUT paid on the
services received and, therefore, the SUT
paid on such services will become an
additional cost of operations.
The implementation of this phase of the
transition process will most likely be the
one that encounters technical obstacles.
Table 1 – Current Taxable Services to Businesses
Bank charges
Collection services
Security and armored services
Cleaning services
Laundering services
Repair and maintenance services
Telecommunication services
Waste collection services
Operating Lease of Car Rentals
Continues on Page 3
ABOUT THE AUTHOR
Denisse Galarza-Mora
Tax Is Our Business®
Act 72-2015: Puerto Rico’s Sales…
Continued from Page 1
Denisse is a Manager at Alvarado
Tax & Business Advisors and has
over eight years of experience in
the corporate and individual tax
advisory areas with various
international and local clients. She
provides corporate and individual
tax services for clients in the retail,
manufacturing, and service
industries, among other.
With regards to the areas of
technical experience and
consulting, Denisse has provided
sales and use tax consulting
services to various municipalities,
governmental agencies and private
industry clients. She has assisted
multiple corporate clients with the
implementation of the recent
changes to the Sales and Use Tax
provisions, which provide for the
collection and remittance of this
tax. She has also assisted
manufacturers and wholesalers in
obtaining sales tax waivers from
the Puerto Rico Treasury
Department to allow them to
continue buying and selling their
goods without sales and use tax.
Denisse represents clients before
the Puerto Rico Treasury
Department on income and sales
and use tax investigations and has
participated in the preparation of
closing agreements and ruling
requests.
Denisse is member of the Puerto
Rico Certified Public Accountants
and has a Bachelor degree in
Business Administration, major in
Accounting and Finance from the
University of Puerto Rico.
Act 72-2015: Puerto Rico’s Sales…
Continued from Page 2
1% municipal SUT) on taxable goods and
10.5% VAT on taxable services. Although
some of the definitions included in the
SUT provisions under the 2011 Code
remain the same, there are important
changes in what is taxed, who is taxed
and how it is taxed. There is also a more
complex credit system than before.
Following, we summarize the most
important VAT provisions.
Due to the broad spectrum of service
transactions it will apply to, the
implementation of this phase will require
specific regulations and guidance from the
Treasury. For example, under current
provisions, subcontracted services are
exempt when rendered between
registered merchants, even though the
service corresponds to one of the nine
taxable services on Table 1. Act 72-2015
does not provide an exception for
subcontracted services that are not
within these nine taxable services,
therefore will become taxable in this
second phase of the transition process.
We expect additional amendments or
guidance be issued in this regards.
Tax Basis and Exclusions
Under a VAT system, a tax is imposed on
the value that a merchant adds to his/her
raw materials or purchases before selling
the new or improved product or service.
Act 72-2015 establishes the mandatory
collection of a VAT on the sale of goods
and services subject to VAT.
Tax Rate
Act 72-2015 establishes a VAT of 11.5%
(10.5% +1%) to be imposed on all
taxable goods and a 10.5% on all taxable
services. However, it specifies that the
sale of goods for export, the rendering
of exported services and the sale of raw
materials and equipment used in
manufacture operations to merchants
who hold a valid Exemption and Zero
Rate Certificate for Eligible
Manufacturing Plant should be taxed at a
0% tax rate (“zero rate”). Pursuant to
Act 72-2015, transactions subject to
11.5%, 10.5% or 0% tax will be
considered taxable transactions although
in the latter, no tax is collected in the
transaction.
VAT Input Credits
Third Phase:
Under the VAT system, each merchant
pays the tax for the purchases it makes of
products and services as part of its
operations to sell its products or
services. Act 72-2015, however, also
provides for several excluded and
exempted transactions from the VAT
(see Table 2 below and Table 3 on Page
4). The excluded or exempted
Act 72-2015 provides for a third and
final phase which is scheduled to be
effective on April 1st, 2016 where the VAT
will be fully implemented, substituting the
Commonwealth SUT. The rate established
for this phase is also 11.5% (10.5% VAT +
Under a VAT system, merchants are
entitled to claim a credit for the amount
of VAT paid on their purchases
(“inputs”). This is how they recover the
VAT paid on their inputs. Act 72-2015
establishes that all merchants, with the
exception of those that hold a Small
Merchant Registration Certificate, will
Table 2 – Exempted Transactions
Financial services,
except for bank
charges
Sale and introduction
of gas, diesel and
other petroleum
products, except
propane gas and
related products
Import and Sale of
Prescription Drugs
Sale of medical
equipment for
disabled persons
Goods acquired
under PAN & WIC
Programs
Goods acquired or
imported by bona
fide farmers
Health and Medical Services
Rental of Principal
Residence
Occasional sale of
goods by churches
or other religious
institutions
Rental of properties
subject to a room
tax
Rental of
Commercial
Property
Educational and
child care services
Certain legal services
rendered under a contingency
agreement
Sale and introduction
of food and
foodstuff
Transfer of donated
goods and services
rendered by nonprofit entities
Goods acquired or
imported by
tourism businesses
Sale of goods or
services reimbursed by
Medicare/
Medicaid and the PR
government health plan
Books (printed)
Goods and services
acquired by
Government (PR
and US)
Equipment acquired
or imported by
Hospital Units
Sale of Real Estate
Sale and Import of
Motor Vehicles
transactions may have a direct impact on
the credit to be claimed by the merchant,
who sells goods or services.
have a right to claim a credit for the VAT
paid on their inputs. This credit is to be
Continues on Page 4
Act 72-2015: Puerto Rico’s Sales…
Continued from Page 4
Please note that the VAT paid on directly
related inputs, such as the purchase of
Table 3 – Excluded Goods and Services
Money
In transit goods (less
than 60 days)
Goods imported into
a Foreign Trade Zone
Goods imported
to PR as part of a
move of a
nonresident
individual
Intangibles (except
computer
programs)
Home Owner
Association’s dues
and fees
Alcoholic beverages
imported into a
bonded warehouse
Services rendered
as an employee
Electricity
Goods sold by
graduating classes
Certified promotional
materials
Aqueduct and
Sewer
Authority Service
Traditional lottery
tickets
Various
telecommunication
services or charges
Property owned by
Government (PR
and US)
Blood, tissues and
human organs
Services rendered by
a related entity that
operates within
Puerto Rico
taken against the tax determined on their
monthly VAT return.
The total amount of VAT credits available
for merchants as approved by Act 72-2015
depends on the taxability of the goods and
services each merchant sells (“outputs”).
Act 72-2015 establishes a methodology to
determine the amount of VAT credits a
merchant may claim in the case it sells
taxable and non-taxable outputs (goods or
taxable goods for resale, may be
completely claimed as VAT credit by the
merchant. On the other hand, a merchant
that sells both taxable and non-taxable
outputs, will not be able to recover all of
the VAT paid on inputs since its VAT
credits will be reduced by a portion related
to its non-taxable outputs, both direct and
indirect. Special provisions apply to
Continues on Page 5
Table 4 – Formula to Determine VAT Credit Available
services). Pursuant to this methodology,
each merchant must begin by determining
the percentage of taxable outputs over
total outputs. Then, the merchant must
evaluate its inputs in order to determine if
they are directly related to the sale of
taxable outputs and must limit the credit
on the VAT paid on indirect inputs to the
proportion of taxable outputs over total
outputs (see Table 4 above).
Key Contacts at
Alvarado Tax &
Business Advisors LLC
Juan A. Alvarado-Zayas, Esq.,
CPA
Managing Member
787-620-7730
[email protected]
Felipe Mariani-Franco, CPA
Member
787-620-7736
[email protected]
Sandra Marie TorresMartínez, CPA
Member
787-620-7728
[email protected]
Edgardo Sanabria-Valentín,
CPA
Member
787-999-3015
[email protected]
Carlos R. González-Martínez,
CPA
Member
787-620-7739
[email protected]
César De Jesús-Umpierre,
CPA
Member
787-620-7734
[email protected]
This publication supports Alvarado Tax & Business Advisors’ marketing of
professional services. It is intended for information purposes only and should not
be regarded as written advice or recommendation to undertake any position, tax
related or otherwise. Readers should not consider the information contained in
this publication to be complete, nor act solely on the basis of the material contain
herein. Moreover, due to changing laws and associated authoritative literature, that
information may not continue to apply to a reader's situation. Therefore, we
encourage the readers to contact us or another qualified professional advisor to
thoroughly evaluate their specific facts and circumstances; to determine if any
information contained in this publication remains valid and; to discuss the potential
application of such information to their particular situations.
As provided in Department of Treasury Circular 230, this publication is not
intended or written by Alvarado Tax & Business Advisors, to be used, and cannot
be used, by a reader or any other person or entity for purposes of avoiding tax
penalties that may be imposed on any taxpayer under the Internal Revenue Code.
Act 72-2015: Puerto Rico’s Sales…
Continued from Page 4
resellers that sell more than 70% of food
and foodstuff, prescription drugs or motor
vehicles, where the above allocation may
not apply and a credit may be claimed up
to their monthly VAT responsibility.
Transitional Provisions
Transitional provisions exist for the
implementation of the tax on services
rendered between merchants. Pursuant to
these rules, items and services for which
contracts and bids already exist as of July
1st, 2015 will be exempt from the increase
in SUT rates for a period of twelve months
or the term of the contract, whichever is
less. Specific rules will apply to items and
services used for the construction of
residential, commercial or industrial
projects.
Act 72-2015 also includes certain
transitional provisions to address the
change from the SUT to the VAT. For
example, it provides for the exclusion of
preexisting contracts and bids from the
application of the new VAT rules. Act
72-2015 provides that all retail sales
covered by contracts related to good and
services, granted prior to April 1, 2016,
will not be subject to VAT for a period of
twelve months or the term of the
contract, whichever is less. Taxable
services rendered after March 31, 2016
will be exempted from the VAT only if paid
Before April 1st, 2016.
Finally, during this transition period, the
certificates (exemption certificate, the
eligible reseller certificate, the reseller
certificate and the merchant’s registration
certificate) granted to merchants will
remain valid. All bonds approved by the
Secretary under the 2011 Code that are
active by April 1, 2016 will also be valid,
but should be evaluated due to the
increase in the tax rate. In the case of
credits that have not been claimed as
refunds and are available to the merchant
by April 1st, 2016, these will be available
as credits for subsequent returns but will
not generate refunds.
CATIC
Act 72-2015 also calls for the immediate
creation of a Commission of Alternatives
to Transform the Consumption Tax
(“CATIC” for its Spanish acronym) whose
main purpose will consist of the evaluation
of different types of tax systems, including
excise taxes, in order to render a report
within sixty (60) days from the
effectiveness of this Act. CATIC should
also evaluate the current tax system to
recommend tax measures that will result
in a just tax systems for individuals. Should
the CATIC’s report include
recommendations to the effect of
transforming the actual SUT system into
an excise tax based system, legislation to
that effect must be submitted within ten
(10) days of the issuance of such report.
ATBA Comments
This transition process will require
merchants to adapt their collection and
reporting procedures to comply with the
above-mentioned changes. The
purpose of a consumption tax is to
collect it from the final consumer
(individual) of the products or services
in order not to increase the costs of
the businesses and, as a consequence,
increase the price of the products or
services they sell. That purpose usually
is achieved by allowing a credit equal
to the SUT/VAT paid on goods and
services purchased by merchants.
However, merchants which sell goods
or services that are exempted or
excluded, or which sell goods or
services to persons that are not
subject to SUT/VAT, will not be able
to credit the totality of the VAT paid
on the goods or services they buy, thus
increasing their costs of operations
which will eventually lead to price
increases. Based on the above, it is
important for merchants to evaluate
the impact that the increase in SUT or
the VAT will have on their business.
Even those merchants that are able to
credit all the VAT they pay shall
consider the impact, if any, of such
costs in their cash flow.
Additional amendments and
publications are expected to be issued
by the Department of Treasury. Our
advisors are ready to assist you in the
determination of the impact of this Act
in your operations and help you
understand the ins and outs of this
consumption tax system.
Alvarado Tax &
Business Advisors LLC
104 Acuarela Marginal Street
Martinez Nadal Expressway
Guaynabo PR 00969
PO Box 195598
San Juan PR 00919-5598
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T. 787.999.4400
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