Tax Reform Process Act 72 - 2015 (P. de la C. 2482)

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Tax Reform Process Act 72 - 2015
(P. de la C. 2482)
Webcast
June 2, 2015

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Agenda
• Summary of the tax reform process as of today:
– P de la C 2329 “Act to Transform the Tax System
of the Commonwealth of Puerto Rico”
– Substitute P de la C 2329
– Act 72 - 2015 (P de la C 2482)
• Changes to Income Tax
• Changes to Sales and Use Tax
• Adoption of Value Added Tax (VAT
• Questions

P. de la C. 2329
"Act to Transform the
Tax System of the
Commonwealth of
Puerto Rico"
Substitute
P. de la C. 2329 P. de la C. 2482
Changes Proposed to Puerto Rico's Tax System
Filed 2/11/2015 Filed 4/29/2015 Filed 5/18/2015
Public Hearings
Killed 4/30/2015
Signed
5/29/2015
Act 72 - 2015

Income Tax

Individual Income Tax:
Regular Tax
Gross Income Tax
Not over $9,000 0%
Over $9,000 but not over $25,000 7% of the excess over $9,000
Over $25,000 but not over $41,500 $1,120 plus 14% of the excess over $25,000
Over $41,500 but not over $61,500 $3,430 plus 25% of the excess over $41,500
Over $61,500 $8,430 plus 33% of the excess over $61,500
Tax tables effective for tax years beginning after 12/31/12, but
before 1/1/14 will apply for tax years starting after 12/31/12:

Gradual Adjustment
– Gradual Adjustment
• for taxable years beginning after 12/31/13:
the gradual adjustment will be applicable
once again for all individuals with income
subject to tax in excess of $500,000.
–such excess will be subject to an additional
5% tax.

Gradual Adjustment
– Limitations for taxable years beginning:
• after 12/31/12, but before 1/1/14
– $8,895, plus 33% of the allowable personal and
dependents exemptions.
• after 12/31/13, but before 1/1/15
• after 12/31/14 and thereafter

Self-employed Individuals
– Self-employed Individuals
• additional tax of 2% on self-employed
individuals will only apply to tax years
commenced after December 31, 2012 but
before January 1, 2015.

Net Operating Losses
– Net Operating Losses
• individuals reporting net losses from a trade
or business for three consecutive tax years
can only carry forward the net operating loss
attributable to the third taxable year and
thereafter, beginning after December 31,
2014, limited to a 50% of such loss. The
other 50% will not be allowed to be carried
forward to future periods.

– Corporation of Individuals, Special Partnership &
Partnerships
• partners of a Corporation of Individuals,
Special Partnerships and Partnerships will
now have a limit on the deductibility of prior
years net operating losses. For years
commencing after December 31, 2014, the
loss deduction will be 80% of the current
year's aggregate distributable share of net
income.

Deductions
– Charitable Contributions
• for taxable years commencing after
December 31, 2014, deductions will only be
allowed for charitable contributions made to
non profit entities certified by the PR
Department of Treasury.
–applicable to entities under the provisions
of Section 1101.01(a)(2) of the PR Tax
Code.

Corporate Income Tax:
Alternative Minimum Tax (AMT)
– AMT will now be the higher of:
• AMT income at the rate of 30%, or
• The sum of:
–Purchases of personal property to related
parties at rates that fluctuate from 2.5% to
6.5%, plus
–Expenses or charges from related parties not
subject to withholding at the rate of 20%
» A waiver may be obtained to reduce 60% of the expenses
subject to the charge.

– Expenses incurred or paid to a related person
• states limitations on the determination of
expenses that may be excluded/waived from
the application of the 20% tax for AMT
purposes.
–expenses that may be excluded from the
20% tax rate cannot exceed the 60% of
the total amount of such expenses.

– Value of purchases of personal property from a
related person
• changes in the applicable tax rate
–2% for taxable years commenced before
January 1, 2015.
–for taxable years commencing after
December 31, 2014, tax rate will vary
according to purchaser's gross revenues
derived from the trade or business in PR.

Value of purchases of personal property from a related person
If purchaser's gross revenues from
the trade or business in PR is:
Tentative Minimum Tax Rate
Equal or more than $10 Million,
but less than $500 Million
2.5%
Equal or more than $500 Million,
but less than $1,500 Million
3.0%
Equal or more than $1,500 Million,
3.5%
Equal or more than $2,000 Million,
4.5%
Equal or more than $2,750 Million 6.5%
For taxable years commencing after December 31, 2014:

– Value of purchases of personal property from a related
person
• changes in the applicable tax rate
– amends section to address exceptions applicable to
purchases subject to the provisions of Section 3020.08
(Vehicles) of Subtitle C of the PR Tax Code.
» for taxable periods ended before
January 1, 2015, such purchases will be subject to
a 1.50%.
» for taxable periods beginning after
December 31, 2014, such purchases will be
subject to a 0.50%.

– Value of purchases of personal property from a
related person
• tax waiver provided under section
1022.03(d)(4) will not be applicable to tax
years beginning after December 31, 2014.
–Notwithstanding, waivers already approved
by the Secretary of the Treasury will
remain in effect for the periods originally
granted.

Corporate Income Tax
• for taxable periods beginning after
December 31, 2014:
–limited to 80% of the net income for regular
taxes.
• for taxable periods ending after
December 31, 2014:
–limited to 70% of the alternative minimum
net income for AMT purposes.

• no deductions will be allowed for expenses incurred
or paid to a related person that does not perform
any trade or business in PR or a home office
located outside of PR by a foreign entity engaged in
trade or business in PR through a branch.
– except for expenses excluded by the Secretary
of the Treasury on Section 1033.17(a)(17)(D).
– certain exceptions apply to exempt businesses
under Act 73-2008, Act 74-2010, Act 83-2010 &
Act 20-2012.

Income Tax
Capital Gains and Losses
• corporations
– for tax years beginning after December 31, 2014:
» limited to 80% of capital gains from such sale.
• for taxpayers other than corporations, 90% limitation
is eliminated.
– Such losses will be allowed up to the amount of
gains generated during the taxable year.
Deduction for excess of loss over gains during the
year will still be limited to $1,000 or the taxpayer's
net income, whichever is less.

Capital Gains and Losses
• for tax years beginning after December 31, 2014,
capital losses carried forward to subsequent years
will be limited to 80% of the current year's net capital
gain.
– Amount of loss to be carried forward to a
subsequent year will be considered as a short
term loss in such year.

Non Deductible Expenses
– Non deductible expenses
• 51% disallowance on expenses incurred or paid
to a related person for tax year beginning after
December 31, 2014.
–states limitations on the determination of
expenses that may be excluded/waived from
this disallowance for regular tax purposes.
»expenses that may be excluded/waived
cannot exceed the 60% of the total
amount of such expenses.

Non Deductible Expenses
– Non deductible expenses
• expenses paid or incurred for services rendered by
a non resident, if such taxpayer has not paid the
sales and use tax and value added tax stated on
Subtitles D and DD respectively, will not be allowed
as a deduction.
• the cost or depreciation of any goods or taxable
item, as per Subtitles D and DD, will not be
deductible if the taxpayer has not paid the
corresponding sales and use tax and value added
tax for such item.

Income Tax:
Other Dispositions
– Includes definition for "Large Taxpayers"
• new rules applicable to the filing of tax returns for these
taxpayers will be established by regulation or any other kind
of publication to be issued by the Secretary of the Treasury.
• must meet at least one of the following requirements:
– Telecommunications
companies
– Entity whose volume of
business was $50,000,000 or
more during the prior tax year.
– Commercial bank or
trust
– Private bank
– Brokerage firms
– Insurance companies

Income Tax:
Other Dispositions
– Tax Credits
• extends the moratorium on certain tax credits
up to tax years commenced until
January 1, 2018.
–applicable to tax credits that were issued
or purchased before June 30, 2013.

Income Tax:
Other Dispositions
– Tax Credits
• extends the moratorium on certain tax credits up to
tax years commenced until January 1, 2018.
– tax credits issued during tax years 2016-2017 &
2017-2018, can only be claimed up to 50% of
such credit during tax years beginning after
December 31, 2016 or December 31, 2017
respectively, and before January 1, 2018 or
2019 respectively. Any remainder can be
claimed in subsequent years.

Income Tax:
Exemption from tax on corporations and non profit
entities
– Establishes the requirement for entities exempt under Section 1101.01(a)
(except cooperatives) to provide evidence that they provide services in
Puerto Rico.
– Organizations subject to this requirement will be:
• churches
• organizations that provide service to the community
• organizations for the exclusive benefit of its members
• organizations providing benefits to employees
• association of property owners
• organizations providing homes for rent
• organizations of labor, agricultural or horticultural
• cemetery companies
• organizations exempt under Act 120 of 1994

Excise Taxes

Add Exemption for Excise Taxes
• Provides the exemption to business under Act 73 of 2008
(Tax Incentives Act for the Development of Puerto Rico)
that uses crude oil, unfinished oils and end products
derived from oil and other hydrocarbons mixture for the
generation of power used by the exempt business.

Excise Taxes - Vehicles
• Increases the excise tax on ATV introduced from abroad or
manufactured in Puerto Rico from a 10% to 11.5% of the
taxable price in Puerto Rico.

Sales and Use Tax

Sales and Use Tax
• Sales and Use tax
– as a transition method/period, the SUT
provisions of 2011 Code, as amended, will still
apply until March 31, 2016, but the applicable
tax rate will increase from a 7% to a 10.5%
(resulting in a combined state and municipal
SUT of 11.5%) effective on July 1, 2015, or the
effective date of this Bill.

Sales and Use Tax
– commencing on October 1, 2015, a new special
SUT rate of 4% will be imposed on (i) certain
services rendered to a merchant and (ii)
designated professional services.
– provides that the 1% municipal SUT will not
apply to services rendered to other merchants or
to designated professional services.

Sales and Use Tax
– the following services previously taxed by Act 40
of 2013 at 7% will now be subject to 10.50%:
• certain bank charges,
• collection services,
• security services, including armored services
and private investigations, except security
services provided to associations of residents
or condo-owners,

Sales and Use Tax
– the following services previously taxed by Act 40 of 2013
at 7% will now be subject to 10.50%:
• cleaning services, except cleaning services provided to
association of residents or condominiums
• laundry services
• non capitalize repair and maintenance services of real and
personal property, except those services provided to association
of residents or condominiums
• telecommunication services

Sales and Use Tax
– the following services previously taxed by Act 40 of 2013
at 7% will now be subject to 10.50%:
• waste collection services, except waste collection services
provided to association of residents or condominiums
• operating leases of motor vehicles that constitute a daily lease,
except those leases of motor vehicles that are essentially
equivalent to a purchase

Excluded Services for Sales and Use Tax
10/1/15 – 3/31/16
• services rendered to other merchants (special tax)
• designated professional services (special tax)
• services provided by the Government of Puerto Rico
• educational services, including tuition costs;
• interest and other charges for the use of money

Excluded Services for Sales and Use Tax
10/1/15 – 3/31/16 cont.
• insurance services and commissions
• health or hospital services
• services rendered by persons whom annual volume of
business is $50,000 or less,
• services rendered between members of a controlled group.

Business to Business Services subject to 4% after
October 1, 2015
Are services rendered to a person engaged in a trade or
business or in the production of income except for:
– taxable services (Act 40 taxable B2B)
– services provided by the Government of Puerto Rico
– educational services, including tuition costs;
– interest and other charges for the use of money
– insurance services and commissions
– health or hospital services
– services rendered by persons whom annual volume of business is
$50,000 or less,
– services rendered between members of a controlled group.

Designated Professional Services subject to 4% after
October 1, 2015
• Agronomists
• Architects and landscape architects
• Certified Public Accountants
• Brokers, sellers and real estate companies
• Professional draftspersons
• Professional real estate appraisers
• Geologists
• Engineers and surveyors
• Legal Services
• Specialist of tax returns (from 9/30/15)

Accounting method for Merchants dedicated to
provide designated professional services
– allows merchants dedicated to provide
designated professional services to use the
cash method of accounting for purposes of the
SUT provisions for tax events occurred after
9/30/15.

Person responsible for tax payment
– Effective July 1, 2015 in the case of services
provided by a non-resident person to a person in
PR, the person responsible for the payment of
the SUT is the person that receives the service
in PR.

Credit for taxes paid by a reseller merchant
– until June 30, 2015 the credit is 75% except for
taxpayers engaged in the sale of unprepared
food and provisions which is 100%.
– for periods after June 30, 2015 the credit is
increased to 100% of the tax liability shown on
tax return.

SUT rate applicable to preexisting contracts and
auctions
– retail sales covered by executed contracts or approved
bids at auction before July 1, 2015 will be subject to the
SUT applicable to such taxable item at June 30, 2015
(7%).
– the person may acquire the taxable items subject to
such contract or auction during a period of:
• 12 months
• contract term

SUT rate applicable to preexisting contracts and
auctions
– in the case of services, the above will apply for those
services paid before 7/1/15
– special rules for contracts for construction of
commercial, industrial or residential projects
• as of 5/30/15
• must register within 90 days
• rate and exclusions applicable are those in effect as
of 6/30/15

Merchants with gross sales of less than $1million for
the preceding taxable year
Sales and Use tax corresponding to the month of July 2015
will be paid:
• 55% of the sales tax will be paid not later than August 20,
2015
• 45% will be paid not later than the 20th day of the months
of September, October and November.

Value Added Tax
("VAT")

Value Added Tax ("VAT")
• A VAT or also goods and
services tax (GST) is a
form of consumption tax.
• For the buyer, it is a tax on
the purchase price.
• For the seller, it is a tax
only on the value added to
a product, material, or
service.
.
• The sellers remit to the
government the difference
between these two
amounts, and retain the
rest for themselves to offset
the taxes they had
previously paid on the
inputs.

VAT
• The value added to a
product by or with a
business is the sale price
charged to its customer,
minus the cost of materials
and other taxable inputs.
• A VAT is like a sales tax in
that ultimately only the end
consumer is taxed.
• It differs from the sales tax
because collections,
remittances to the
government, and credits for
taxes already paid occur
each time a business in the
supply chain purchases
products.

VAT
• Effectiveness - for transactions after 03/31/2016
• general rate is 10.5% on taxable articles and
transactions, except for the following which
have a 0% rate:
–sale of goods for export
–provision of services for export
–certain sales to manufacturers (Exemption
Certificate and Zero Rate for Manufacturing
Plants).

VAT
New terms
1. Value Added Tax (VAT or
IVA)
2. Taxable transactions:
1. sale of goods and
services
2. rendering of services by
a nonresident person to
a person in PR
3. combined transactions
Old terms
1. Sales and Use Tax (SUT
or IVU)
2. Taxable item:
1. tangible personal
property
2. services
3. admission rights
4. combined transactions

VAT
New terms
3. Merchant
4. Place
5. Eligible merchant
6. Small merchant
Old terms
3. Nexus
4. Source

VAT

VAT
• Exclusions from VAT:
• the term "goods" excludes the following:
o money, stocks, bonds, notes, life insurance, and other
securities and obligations
o intangibles (except computer programs)
o blood, products derived from blood, and human tissue
and organs
o electricity
o water supplied by the PR Aqueduct and Sewer
Authority
o any property of the Commonwealth of PR or of the
U.S. Government

VAT
• the term "introduction" excludes the following:
• articles introduced into foreign trade zones
• articles that are part of a move
• temporary introduction of articles
• alcoholic beverages deposited in a bonded
warehouse under certain conditions
• certain promotional materials introduced into
PR

VAT
• the term "services" excludes the following:
o services rendered between affiliated entities
o services rendered by the PR Government and by the
U.S. Government
o services rendered as an employee
o certain shipping services of goods by air or sea
• the term "sales" excludes the following:
o exempt transfers under Subtitle A of the Code
o the delivery of donated goods

VAT
• other items excluded from VAT:
o certain entertainment machines
o sales by non-merchants
o certain admission rights

VAT
• Taxable transactions exempt from VAT:
• certain financial services (other than bank charges)
• prescription medicines and articles for the treatment of
health conditions
• articles and equipment to correct physical deficiencies
• sales and services that qualify for Medicare, Medicaid
and the PR Government’s Health Insurance Plan
• sales and services to the U.S. Government and PR
Government
• sale of petroleum derivatives
• certain hotel room charges

VAT
• sale of unprepared food and food ingredients
• sales of goods acquired with PAN or WIC funds
• sale of real property
• real property leases by individuals for principal residence, students
• commercial real property leases
• sale of goods by non-profit entities, provided that such goods were
acquired by the entity through donation
• certain sales to hospitals
• certain sales of agriculture products to bona fide farmers
• occasional sales of goods by churches or religious organizations
• educational and child care services

VAT
• sales to hotels to be used in the exempt
operation
• sale of printed books
• sale of vehicles, boats and heavy equipment
• certain health and hospital doctors services in
humans or animals
• legal services in cases involving family, food,
medical "mal practice" and mental and physical
damages claims

VAT
• Exempt articles introduced or imported into PR:
• articles for manufacturing (raw material and
certain machinery and equipment)
• prescription medicines
• articles for the treatment of health conditions
• articles and equipment to correct physical
deficiencies
• articles that qualify for Medicare, Medicaid and
the PR Government's Health Insurance Plan

VAT
• articles introduced by the U.S. Government and
PR Government
• petroleum derivate
• certain unprepared food and food ingredients
• machinery and equipment by hospital units that
hold a Certificate of Exempt Purchases

VAT
• agriculture articles by bona fide farmers
• certain articles by hotels to be used in the
exempt operation
• printed books
• vehicles, boats and heavy equipment

VAT – Person responsible for the tax
• the person that introduces the article to
PR;
• non retail sales - the seller as withholding
agent for the buyer is primarily
responsible, but the person that buys the
goods or services is also responsible;
• retail sales – the seller as withholding
agent for the buyer.
• services rendered by a non-resident to a
PR resident – the person in PR that
receives the service.

VAT – Collection of the tax
• The merchant that sells the goods or
services, except for small merchants:
– sales to merchants
• Fiscal statement
• Debit and Credit notes
– retail sales
• VAT shown separately
• Waiver for collection:
– Certificate Exempt Purchases
– Certificate of Exemption Manufacturing
Plant

VAT – Collection of the tax
• Special rules for sales delivered by mail to
Puerto Rico residents:
– internet sales
– mail order sales
– any other telecommunications means

VAT
• time and form of payment
• returns
• adjustments, credits and reimbursements
• registry
– merchants
– small business

VAT
• certificates:
– exempt purchases
– manufacturing plant
– eligible merchant
• transitory provisions
– current certificates
• effectiveness of such certificates was not discussed
in P. de la C. 2482.
– bonds will be effective until expiration date
– current credits – will carry forward but not reimbursable

Additional provisions included
• Commission for Alternatives to Transform the
Consumption Tax ("Comisión de Alternativas para
Transformar el Impuesto al Consumo" (CATIC))
–to provide a report 60 days after the
enactment of the Law.
• Interagency portal for the fiscalization of tax
responsibility of Individuals and Corporations
("Portal Interagencial de Fiscalización de la
Responsabilidad Contributiva del Individuo y las
Corporaciones")

Up to 6/30/15
General SUT = 6%*
Designated Serv. = exempt
B2B = exempt
07/01/15 - 9/30/15
General SUT = 10.5%*
B2B = exempt
10/1/15 – 3/31/16
General SUT = 10.5%*
Designated Serv. = 4%
B2B = 4%
4/1/16
General VAT = 10.5% or 0%
(credit)
Designated Serv. = 10.5%
(credit)
B2B = 10.5% (credit)
State Level
Municipal Level
Up to 6/30/15
General SUT = 1%
B2B = exempt
07/01/15 - 9/30/15
General SUT = 1%
B2B = exempt
10/1/15 – 3/31/16
General SUT = 1%
B2B = exempt
4/1/16
General SUT = 1%
Designated Serv. = ?
B2B = ?
* resellers get a credit and
applies to taxable B2B
Summary

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Tax Reform Process Act 72 - 2015 (P. de la C. 2482)

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Notes de l'éditeur