CHANGES TO PUERTO RICO’S
TAX SYSTEM
Changes to Puerto Rico’s
Tax System
Act 72-2015 was enacted on May 29, 2015 to
introduce significant changes to the 2011 Puerto Rico
Internal Revenue Code, as amended. The Act
includes, among other things, changes to income
taxes, increases the sales and use tax (“SUT”) rate and
introduces the value added tax (“VAT”).
INCOME TAXES - INDIVIDUALS
1. Regular tax rates applicable to taxable years
commencing after 12/31/2014:
Taxable Income
Up to $9,000
$9,001 to $25,000
$25,001 to $41,500
$41,501 to $61,500
Over $61,500
Tax
0%
7% on excess over
$9,000
$1,120 plus 14% of
excess over $25,000
$3,430 plus 25% of
excess over $41,500
$8,430 plus 33% of
excess over $61,500
2.
Gradual Adjustment for taxable years
commenced after 12/31/2014 will be 5% of the
excess of the net taxable income exceeding
$500,000.
3.
The 2% special tax on self-employed individuals
is eliminated.
4.
Net Operating Losses (“NOLs")
a.
b.
Individuals engaged in a trade or business
and that incur NOLs for three consecutive
tax years will only be able to carryover 50%
of the loss incurred in the third and
subsequent years. For these purposes, real
estate rental will not be considered a trade
or business.
The distributable share of NOLs of
shareholders or partners in a corporation of
individuals,
special
partnerships
or
partnerships that may be claimed against
the distributable share of net income of the
other corporations of individuals, special
partnerships or partnerships is limited to
80% of the distributable share of net income.
5.
The 90% limitation on capital losses carryover is
eliminated.
6.
Charitable contributions to certain non-for-profit
organizations will only be deductible if the
Organization is qualified by the Secretary and
renders services in Puerto Rico.
INCOME TAXES - CORPORATIONS
1. “Large Taxpayers”
A new category of “Large Taxpayers” is created. This
category includes taxpayers with volume of business
exceeding $50 million and that are in the following
business:
a.
b.
c.
d.
e.
commercial banks or trust companies
private banks
broker-dealers
insurance companies
entities engaged in the telecommunications
business
Large Taxpayers are required to file their income tax
returns electronically or at the tax office designated
by the Secretary by regulation, administrative
determination, circular letter or informative bulletin
of a general nature.
2.
Regular income tax rates remain the same.
3.
Alternative Minimum Tax
a.
The tentative minimum tax (“TMT”) for
purposes of the determination of the
alternative minimum tax (“AMT”) is
currently the greater of:
i.
ii.
30% of the AMT income; or
The sum of:
Changes to Puerto Rico’s
Tax System


20% of payments to a related
party and/or 20% of costs
allocated from a “home office” to
the Puerto Rico branch, if such
amounts are attributable to a
Puerto Rico business and not
subject to Puerto Rico income tax
in the taxable year in which they
are paid or incurred (“RelatedParty Charges”); and
2% (or other applicable special
rate) of the value of personal
property purchased from a related
party or transferred to a Puerto
Rico branch from its “home office
(“TMT Property Component”).
Charges will in any event be subject to the 20% TMT
computation and the 51% deduction disallowance.
For taxable years after 12/31/2014, waivers will no
longer be available regarding the TMT Property
Component. Waivers already issued will continue in
effect for the taxable years covered thereunder. In
the event that the waivers cover years commenced
after 12/31/2014, the applicable rate will be the one
set forth in the Code or in the waiver, at the option of
the taxpayer. The Secretary is expressly prohibited
from issuing administrative determinations or closing
agreements in connection with the TMT Property
Component for taxable years commenced after
12/31/2014.
4.
Net Operating Losses
Act 72-2015 decreases the allowable NOL deduction
for purposes of determining such income from 80% to
70% of the alternative minimum taxable income for
taxable years commenced after 12/31/2014.
a.
For taxable years commencing after
12/31/2014, the amount of NOLs to be
carried over is reduced from 90% to 80% of
the Taxpayer’s “Adjusted Net Income”.
Regarding the TMT Property Component, with
respect to taxable years commenced after
12/31/2014, the generally applicable rate increases
from 2% to the following:
b.
In computing the “Adjusted Net Income” for
a carryover year, no deduction will be
allowed for expenses paid or accrued to a
related person or home office unless to the
extent allowed as a deduction for regular
income tax.
Gross Receipts
$10,000,000 to $500,000,000
$500,000,001 to $1,500,000,000
$1,500,000,001 to $2,000,000,000
$2,000,000,001 to $2,750,000,000
Over $2,750,000,000
Tax Rate
2.5%
3.0%
3.5%
4.5%
6.5%
5.
For taxable years commencing after 12/31/2014,
the amount of capital loss carryover is reduced
from 90% to 80 of the net capital gains.
6.
Disallowance of Deductions
The rate applicable for the TMT Property Component
with respect to vehicles subject to excise tax is
reduced from 1.5% to .5%.
a.
Waivers can be requested to exclude Related-Party
Charges from the 20% TMT computation. The waiver,
which would also exclude such charges from the 51%
deduction disallowance, can only cover up to 60% of
the same. In other words, 40% of Related-Party
Amounts paid for services rendered by a
nonresident are not deductible if the Puerto
Rico recipient has not paid SUT or VAT on
such services.
b.
Depreciation expense is not deductible if the
SUT or VAT has not been paid on the taxable
goods.
Changes to Puerto Rico’s
Tax System
EXCISE TAXES
1. The fuel used by grantees of tax exemption under
Act No. 73-2008 will be exempt from the
additional excise taxes of $9.25 and $6.25 per
barrel (or fraction thereof) imposed by Act 12015 if used for:
2.
a.
the cogeneration of electric power for their
own use (or for use by their affiliates); or
b.
energy efficient equipment properly
certified
by
the
Energy
Affairs
Administration.
The excise tax on “All Terrain Vehicles” or “Four
Tracks” is increased from 10% to 11.5%.
SALES AND USE TAX (SUT)
1. The provisions of the Code related to SUT will
remain in force until 3/31/2016, but will increase
from 6% to 10.5% commencing on 7/1/2015.
Combined with the municipal SUT, the total SUT
rate will be 11.5%.
2.
3.
4.
Commencing on 10/1/2015 and through
3/31/2016, a new 4% SUT on designated
professional services and on services rendered to
other merchants (“B2B”) becomes effective. The
municipal SUT (1%) will not be imposed on
services subject to the 4% SUT.
Currently taxable services will increase from 7%
to 11.5% commencing on 7/1/2015 (bank
charges on commercial accounts; collection
services; security services, including armored
services and private investigation
services;
cleaning and laundry services; repair and
maintenance
services; telecommunication
services; waste disposal services; and daily
rentals of vehicles).
The following services will not be subject to
either the regular 7% or 11.5% on services:
services rendered by the Government of Puerto
Rico; educational services, including tuition
costs; interest and other charges for the use of
money, and service charges; insurance services
and commissions; health and hospital medical or
veterinary services; services rendered by a
person whose annual volume of business does
not exceed $50,000; and services rendered by a
person or for a person that is a member of a
controlled group of corporations or related
entities, provided the entities are engaged in a
trade or business in Puerto Rico.
5.
In the event of services provided by a
nonresident to a person in Puerto Rico, the
recipient of the services is responsible for paying
the SUT.
6.
Effective 7/1/2015, the credit limitation 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.
7.
Sales of taxable items covered by contracts or
bids executed before 7/1/2015 are subject to the
7% SUT for the shortest of a 12 month period or
the duration of the contract. This rule will be
applicable for taxable services if the amount was
prepaid prior to 7/1/2015.
8.
Construction contracts for commercial, industrial
or residential purposes that complied with
certain requirements by 5/30/2015 may be
eligible for registration in a construction contract
registry which may enable the acquisition of
certain taxable items related to the performance
of the contract at the 7% SUT.
9.
The SUT on sales by merchants whose gross sales
for 2014 did not exceed $1 million will have the
option to deposit the July’s SUT collections as
follows: 55% of the SUT collections will be due no
later than 8/20/2015 and the remaining 45% of
the SUT collections may be paid in three equal
installments not later than the 20th of
September, October, and November of 2015.
Changes to Puerto Rico’s
Tax System
VALUE ADDED TAX (VAT)
1. Commencing on 4/1/2016, the introduction to
Puerto Rico of taxable items and the sale or
transfer of taxable goods and services and
combined transactions will be subject to either a
10.5% or 0% VAT (in addition to a 1% municipal
SUT).
2.
A 0% VAT will apply to the following Taxable
Transactions: the sale of goods for export; the
rendering of export services; and raw materials,
articles, and equipment used by a manufacturing
plant.
3.
The following items and transactions will be
exempt from the VAT:
a.
b.
c.
d.
e.
f.
g.
h.
i.
Financial services, except those in which
bank charges apply;
The import and sale of prescription
medicines including bottles, security caps,
labels and bags inherent to the dispatch of
prescription medicines;
Import and sale of items for the treatment of
health conditions;
Import and sale of items and equipment for
physical or physiological deficiencies when
the purchaser can acquire them at zero-rate;
The import of any item, the sale of any good
or any service rendered that is paid or
reimbursed by Medicare, Medicaid or the
Puerto Rico Government’s health insurance;
Items introduced to Puerto Rico by, and the
sale of goods and services to, agencies or
instrumentalities of the United States
Government, any of its states, District of
Columbia or the Puerto Rico Government;
Import and sale of gas, aviation fuel, gas oil,
diesel oil, crude oil, partially elaborated and
finished products derived from oil and other
hydrocarbon mixtures to which excise taxes
apply;
Lease of property subject to the room tax;
Import and sale of food and food
ingredients;
j.
Sale of goods purchased with funds received
by the Federal Nutritional Assistance
Program or the Special Supplemental
Nutrition Program for Women, Infants and
Children;
k. Sale of real property;
l. Lease of real property that constitutes the
principal residence of the lessor, including
student and elderly housing;
m. Commercial leases, including payments for
office or sales spaces, storage and parking;
n. The cost-free transfer of goods and the
services rendered by not-for-profit entities
that have received tax exemption from the
PR Treasury Department;
o. Import of machinery, medical/surgical
materials, items, equipment and technology
by, and their sale to, any hospital unit with
an Exempt Purchases Certificate;
p. Agriculture items imported by or sold to
bona fide farmers;
q. Occasional sales by churches and religious
organizations;
r. Import and sale of goods by a merchant
dedicated to a tourist business with an
Exempt Purchases Certificate;
s. Educational services and child care services;
t. Manufacturing items introduced to Puerto
Rico by or sold to a Manufacturing Plant with
a duly issued Manufacturing Plant
Exemption Certificate;
u. Import and sale of text books;
v. Import and sale of vehicles, boats and heavy
equipment subject to excise taxes; and
w. Health and hospital services.
4.
Taxpayers using the accrual method of
accounting will have to pay the VAT to be
collected at the earlier of the following events:
issuance of the invoice; receipt of payment; or 30
days after delivery of the goods or completion of
the services.
5.
A credit will be available for the following: VAT
paid on import of items to Puerto Rico as
reported in the Tax on Imports Monthly Return
Changes to Puerto Rico’s
Tax System
that are directly or indirectly related to the sale
of taxable goods or services, whether subject to
the 10.5% tax rate or Zero-rated; VAT paid on
purchases of goods and services as reflected in
the Fiscal Vouchers, that are directly or indirectly
related to the sale of taxable goods or services;
and VAT paid by a merchant for receiving services
from a non-PR resident as reflected in a VAT
Monthly Return.
6.
7.
Special rules apply in cases in which the VAT paid
cannot be traced directly to a particular good. In
these cases, the VAT to be credited will be limited
to the amount equivalent to the proportion of
total taxable sales over total sales. An exception
to this rule applies to merchants that are
primarily dedicated to sale of prepared foods and
supplies and merchants that are principally
dedicated to the sale of prescription medicines,
medicines, or items for the treatment of health
conditions.
An overpayment of up to $10,000 generated due
to the excess of adjustments or credits may be
applied in the VAT Monthly Return of the month
following the month in which the overpayment
arises. A refund may be requested by merchants
that accumulate an overpayment in excess of
$10,000 provided that such merchant is an
“Eligible Merchant” or the merchant has
generated overpayments for three consecutive
months.
Contacts
For additional information about this matter, please
contact any of the members of our Puerto Rico Tax
Group at (787) 641-9801.
Juan Robles, CPA
Tax Partner
[email protected]
Gabriel Viera, CPA
Tax Director
[email protected]
Tayra Marcano, CPA
Tax Associate
[email protected]
Angélica Rosado
Tax Associate
[email protected]
Physical Address
650 Muñoz Rivera Ave.
Suite 502
San Juan PR 00918-4149
Postal Address
PO Box 195607
San Juan, PR 00919-5607
This document has been prepared for information purposes only.
It is not intended as, nor does it constitute written advice or
recommendation to undertake any position, tax related or
otherwise. HLB Parissi accepts no responsibility for any error this
publication may contain, whether caused by negligence or
otherwise, or for any loss, however caused, sustained by any
person who relies on it. You should not act upon the information
contained in this publication without obtaining specific
professional tax advice.
HLB Parissi is part of HLB International, a world-wide network of
independent professional accounting firms and business advisers
founded in 1969. The network comprises member firms in over
100 countries who, collectively, have over 1,750 partners plus
14,000 staff in 480 offices. Member firms provide clients with a
comprehensive and personal service relating to auditing, taxation,
accounting, and general and financial management advice.