Puerto Rico Enacts Tax Reform Legislation Phasing From Sales Tax To Value Added Tax

Author:Mr Rob Clarke, Adam Raschke, Maria de los A. Rivera and Javier Oyola
Profession:Grant Thornton LLP
 
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The Commonwealth of Puerto Rico has enacted the Tax Reform Process Act, which will phase the Puerto Rican indirect tax system from a sales and use tax (SUT) to a value added tax (VAT).1 The tax reform is being implemented in a three-phase process. On July 1, 2015, the total SUT rate was increased from 7 percent to 11.5 percent.2 On October 1, 2015, the SUT base will be expanded to include a new designated professional services tax and a business-to-business (B2B) tax. Finally, on April 1, 2016, the VAT will be implemented at a rate of 10.5 percent.3 These major changes have been enacted in an effort to address Puerto Rico's budget deficit.

Background

Earlier this year, many facets of the Puerto Rican government worked together to draft H.B. 2329. This legislation, in an early form, would have reduced certain income tax rates and phased in a VAT. Somewhat surprisingly, however, on April 30, 2015, the Puerto Rico House of Representatives voted down the measure. Acknowledging that budget issues needed to be addressed, the governor and members of the legislature soon began negotiations and bill drafting in an effort to replace the defeated bill. Their efforts succeeded, and H.B. 2482 was filed on May 18, 2015. The resulting bill passed and was signed by the governor on May 29, 2015. Under this legislation, the Tax Reform Process Act, the proposed income tax breaks were not enacted, but the transition to a VAT is retained. The legislation provides a three-phase plan to transition from the SUT to a VAT.

Current Sales and Use Tax

The SUT, commonly referenced in Puerto Rico as the "Impuesto sobre Ventas y Uso" (IVU), was originally implemented in 2006 and is governed by the 2011 Internal Revenue Code for a New Puerto Rico. The IVU rate of 7 percent in effect prior to July 1, 2015 was comprised of 6 percent allocated to the Puerto Rican government and 1 percent allocated to the associated municipality. The IVU must be collected by every merchant engaged in any business that sells taxable items as a withholding agent for the government.

The IVU applies to sales of taxable personal property, taxable services, and admission rights. A B2B exemption also applies to a number of transactions, but this exemption was limited in 2013. As a result of the 2013 limitations, certain service charges are now subject to tax, including certain bank charges, collection services, security services, cleaning services, dry cleaners, repair and maintenance services to...

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